Why Kenya should consider issuing a State Covid-19 bond

The third wave of Covid -19 infections in Kenya is likely to cause a major social and economic shock arising from the containment measures by the government that have the potential to severely disrupt domestic economic activity.

The cost of the containment measures is aggravated by Kenya’s large informal sector and high poverty level and unemployment rate. Notably, unlike in 2020, the latest containment measures by the government do propose any stimulus packages or reliefs to households and businesses.

The pandemic has exacerbated many structural inequities. Lack of access to quality healthcare among the vulnerable is likely to worsen co-morbidities and increase the risk of death from Covid, financial instability among small businesses and loss of jobs and livelihoods.Education will also be disrupted due to a lack of access to remote learning capabilities.

Globally, there has been increased interest by investors in funding social projects that address rising unemployment, income inequality, poverty, strains on health care and education through the issuance of social bonds by corporates and governments as a way to address social divisions laid bare by the health crisis. One such bond has been dubbed the Covid-19 bond.

Social bonds are a form of debt that allow investors to help raise funds for projects with positive social outcomes for a return on investment. They include projects on improving food security and access to education, as well as health care and financing of businesses. Just like other vanilla bonds, social bonds are tradable on the stock exchange.

While social bonds only make a small part of the multi-billion dollar global sustainable debt market, their popularity has been surging amid the pandemic. Various entities have responded by issuing coronavirus-linked social bonds. In 2020, the African Development Bank (AfDB), the International Finance Corporation (IFC), the Ford Foundation, and Spain’s CaixaBank SA, among others, issued social bonds aimed at alleviating the impact of Covid-19.

The AfDB Fight Covid-19 social bond, floated on the Luxembourg Stock Exchange in 2020, was significantly oversubscribed. The bond was listed on the London Stock Exchange and was admitted on the Nasdaq Sustainable Bond Platform. Bond proceeds, with a three-year maturity, would be used to alleviate the impact of the pandemic on livelihoods and Africa’s economies.

A report by Morgan Stanley indicates that $32 billion of social and sustainability bonds were issued in April 2020 alone. Trading of the social bonds attracted tremendous interest from investors. A final order book of over $3.4 billion for the initial IFC Covid Bond in 2020 is testament that investors are keen to support the alleviation of social issues, aggravated by the Covid -19 pandemic.

The capacity of the Kenyan government to protect its population is hampered by fiscal constraints. Already, Kenya’s official debts represent around a third of the country’s total public external debt. Notably, the economic strategy of the government hinges on the expectations of new financing and a substantial consolidation plan.

It is time to the government to highly consider issuing a Covid bond to address health needs, access to vaccination, restore economic stability and preserve jobs.

Although T-bills remained oversubscribed in March 2021 with bids totalling Sh27.6 billion against an advertised amount of Sh24.0 billion, the government was still 9.6 percent behind its current borrowing target — having received Sh358.5 billion against a domestic borrowing target of Sh572.7 billion.

The increased yields on the Eurobond coupled with the downgrading of Kenya’s credit rating by Standard & Poor’s to ‘B’ from ‘B+’ means that Kenya would find it harder to borrow from the international market and may have to pay more on interest due to the perceived higher risk.

With infection rates rising speedily, it is clear that mitigating the economic impact of Covid-19 will require ambitious stimulus measures and financing. This is where a Covid bond would play a vital role, given the ability of such social bonds to tap into international capital markets while taking advantage of the increasing popularity of sustainable investing.

A Covid bond would be the ideal financial instrument for the government to attract investors seeking to allocate capital toward Covid-19-related relief or recovery measures.

The government has an immediate borrowing need to finance the procurement and distribution of the vaccine and to address the much-needed stimulus packages to support the economy in the wake of the recent containment measures.

By issuing and listing a Covid bond at this time, the government would signal its commitment to a more inclusive economy.

The use of proceeds generated from the Covid bond would only be to finance direct or indirect challenges related to Covid-19. Governance structures should be put in place to ensure that the proceeds are allocated to credible Covid-related projects that create positive impact.