A spike in interest rates on the issued Eurobonds would have implied that investors would likely demand a higher return on future debt issuances by Kenya in the international markets as the country is assessed to be at a high risk of debt default.
Interest rates on Kenya’s issued Eurobonds have fallen while the exchange rate remains unchanged, signalling market calm amid the sovereign credit rating downgrade, which has been feared to raise the country’s risk profile in domestic and international markets.
Yields on the Eurobonds have trended lower in recent days in contrast to last week, surprising market observers who had expected the ratings downgrade to drive fear and selloff activity.
The prevalence of calm in the market, which has also seen the Kenya shilling trade within a narrow range and foreign inflows to the Nairobi Securities Exchange (NSE) persist, will be positive news for the government, which had fretted over an adverse reaction to the rating downgrade, including steeper credit costs and investor flight.
Eurobond yields have, however, defied the downvote on the country’s credit rating by falling, with the paper maturing in 2034, for instance, marking the highest gains between Monday morning and Tuesday evening.
The yield on the 2034 Eurobond fell to 10.3506 percent on Tuesday night from 10.4596 percent in early Monday.
The 2027 Eurobond, which traded at 8.7476 percent on Tuesday, marked gains of more than one percent within days, having traded at 10.034 percent on July 4.
The Kenya shilling has, meanwhile, remained largely unchanged but has weakened slightly to trade at Sh128.60 on Tuesday from Sh128.52 on Monday and Sh128.46 on July 4.
Foreign flows to the NSE have remained resilient, with offshore investors registering a net buying position of Sh31.49 million on Tuesday, partly inversing Sh63.27 million in sales on Monday.
A spike in interest rates on the issued Eurobonds would have implied that investors would likely demand a higher return on future debt issuances by Kenya in the international markets as the country is assessed to be at a high risk of debt default.
Standard Investment Bank senior research associate Stellar Swakei says investors have not been reactionary after the ratings downgrade, there being no upcoming maturities in the short term, and from expectations that the government can anchor fiscal consolidation and debt sustainability over the long term.
“I think the maturities are not close enough, and going by that, investors see room for improvement around the fiscal concerns. The markets are also clinging to word that the National Treasury could return to buy back a further $1 billion (Sh128.6 billion) of its outstanding Eurobond notes,” she noted.
Global rating agency Moody’s downgraded Kenya’s credit rating deeper into junk territory on Tuesday, noting the country would struggle to address the high cost and volume of public debt following the withdrawal of the Finance Bill 2024, which sought to bring new revenue-raising measures with the goal of building further gains on fiscal consolidation.
While Eurobond yields have dropped, interest rates on the government’s domestic securities are, however, seen soaring as the Treasury is tipped to increase its local borrowing target in the wake of the frozen revenue-raising measures.
The rating downgrade is not expected to negatively impact the domestic capital markets, as the market regulator notes sound fundamentals that have lifted the NSE bourse to sit among the best-performing stock markets so far in 2024.
“Theirs (Moody’s) is an assessment, but as long as the fundamentals remain strong and investors understand the environment, I do not foresee a further deterioration. Of course, the downgrade is negative, but there is hope that we can resolve our issues. We have been in a worse situation before,” said Capital Markets Authority chief executive Wycliffe Shamiah.
