Kenya has been advised to tap the international market early for funds to refinance the five-year Eurobond that matures next year, to minimise the currency risk brought on by a widening fiscal deficit and higher oil prices.
Analysts at Dyer & Blair Investment Bank in the 2018 fixed income outlook say that taking up a new Eurobond this year will also reduce pressure on domestic borrowing, which could push yields even lower reducing financing costs for the Treasury.
Kenya faces a huge task in raising funds to pay off the $500 million due next year for the five-year tranche of the Eurobond, while also raising funds to finance a larger recurrent and development expenditure bill amid difficulties in meeting the tax revenue target.
“We believe that Kenya will have to borrow again in order to meet its Eurobond maturity in 2019 and to finance her widening fiscal deficit,” said Dyer in the report.
“In anticipation that the currency situation is bound to get worse, we believe that the government should tap the Eurobond markets ahead of 2019. Further depreciation of the currency is, however, bound to raise the cost of refinancing.”
The government has been planning a return to the international market for another Eurobond. The Treasury has, however, remained non-committal on the possible time they will do so, saying they are waiting for the right conditions before issuing the debt.
Although the shilling has started the year on a strong footing against the dollar, the analysts see it coming under pressure later in the year once the full effect of the higher oil prices hit home.
Dyer notes that the US fed could raise the Federal Reserve rate again this year, which would reduce the amount of portfolio inflows for economies such as Kenya’s, thus affecting the shilling negatively.