Nairobi shrugged off a ratings downgrade and loss of access to an IMF standby credit facility to raise a Sh202 billion ($2 billion) bond that added impetus to recent concerns over the rate at which Kenya is accumulating debt.
The Eurobond, the second in a span of four years, will cost taxpayers a total of $3.2 billion (Sh323 billion) in interest payments during its lifetime of up to 30 years, according to early calculations and the International Monetary Fund (IMF) said Kenya needs a credible plan to tackle its fiscal deficit, which is the main driver of borrowing.
At Sh323 billion, the interest payments, are equivalent to the cost of building the Mombasa to Nairobi segment of the standard gauge railway, and is the clearest indicator of the high cost of borrowing from the international bond markets, which President Uhuru Kenyatta’s government has preferred over concessional loans that carry lower interest rate and can be paid on reducing balance terms.
Kenya pulled through its borrowing from foreign financial markets despite last week’s credit ratings downgrade by Moody’s. More bad news came on Tuesday, after the International Monetary Fund said it had frozen Kenya’s access to a Sh150 billion ($1.5 billion) standby facility last June, after the parties failed to agree on fiscal consolidation and delay in completing a review.
The National Treasury said it had issued the bond in two Sh101 billion ($1 billion) tranches of 10 and 30 years, at a coupon of 7.25 per cent and 8.25 per cent respectively.
Interest on the 30-year tranche amounts to Sh8.3 billion $82.5 million) a year, and for the 10-year at Sh7.3 billion ($72.5 million), working out to a total of $2.48 billion and $725 million respectively.
The taxpayers will also have to pay the lenders the principal of $2 billion at the dates of maturity in February 2028 and 2048.
The value of the interest payments in shillings is also exposed to foreign exchange risk, where fluctuations in exchange rate could push the cost of the debt higher should the shilling weaken, or lower if the shilling gains against the dollar.
The new Eurobond issue was seven times oversubscribed, attracting bids worth $14 billion (Sh1.4 trillion), which analysts say is an indicator that international investors considered the pricing generous.
News that the IMF had suspended Kenya’s access to a precautionary facility of $1.5 billion (Sh152 billion) since last June would also have played on investors’ minds as they priced their bids.
“These Eurobonds were generously priced and priced to clear. Initial guidance was substantively higher, which led me to believe the government was seeking to sell $3 billion, but the rate was compressed and we sold $2 billion. The Moody’s downgrade and the IMF facility back and forth probably pressured the price as well,” said Aly- Khan Satchu, an independent analyst.
The interest cost, although spread over a long period, will undoubtedly catch the eye given the recent concern over the cost of Kenya’s debt.
Kenya is set to spend a record Sh1 trillion—equivalent to Sh54 out of every Sh100 collected in revenue— servicing debt in the 2018/19 fiscal year, up from Sh658.2 billion in the current fiscal year and Sh435.7 billion in 2016/17.
The amounts cover both principal maturities and interest payments.
The Eurobond, which is listed on the London Stock Exchange (LSE), was arranged by Citi, JP Morgan, Standard Bank of South Africa and Standard Chartered.
It is Kenya’s second such issue, the maiden one having been the $2.75 billion issued in 2014 in two tranches of five ($750 million) and 10-years ($2 billion).
Attention will now turn to Treasury secretary Henry Rotich to give finer details of how the government intends to spend the proceeds of the bond.
President Kenyatta, on Twitter, promised to ensure prudent, transparent and efficient utilisation and management of the proceeds to enhance the social and economic welfare of Kenyans.
The last Eurobond issue in 2014 raised political noise after the opposition Cord coalition alleged that the proceeds had been misused, a claim the Treasury dismissed even though it was unable to provide exact details of how respective ministries used their share of the money.
The Treasury said in a statement that the proceeds of this year’s Eurobond will go towards development spending, although it had indicated that a portion of it would to retiring maturing foreign debt.
“The funds will be applied towards the government’s development initiatives and liability management. We will continue to invest in the infrastructure and capacity to roll out these programmes,” the statement said.
Part of the debt likely to be retired by the proceeds of the 2018 Eurobond is the $750 million tranche of the 2014 issue, which matures in June next year.
In the present however, the new Sh202 billion loan will push Kenya’s total public debt up by at least 4.4 per cent, to Sh4.84 trillion from the current Sh4.64 trillion.
The rising level of debt has raised concern, especially over its effect on Kenya’s struggles to bring down her budget deficit, which currently stands at 8.9 per cent.
Kenya’s public debt has more than doubled in the last five years, having stood at Sh1.77 trillion in February 2013.