As Kenya prepares to issue a new Eurobond this year, foreign investors have slapped a risk premium on the country’s international borrowing, making the planned debt more expensive to taxpayers.
This has not come as good news, especially at a time when activity on the Nairobi Securities Exchange has slumped, mostly because of foreign investors.
The EastAfrican has learnt that in the current fiscal year, Kenyan taxpayers will fork out close to Ksh100 billion ($1 billion) in interest payments on foreign loans while clearing maturing debts estimated at Ksh380 billion ($3.8 billion).
With debt repayment taking more than 50 per cent of the total revenue, the government has found itself hard-pressed to fund big infrastructure projects and their day-to-day operations.
But this will not be a Kenyan problem only. Global rating agency Moody’s Investor Service says that huge government debt and especially foreign currency-denominated debt is increasing risks for African countries.
In 2018, the agency downgraded Kenya’s credit scores, which it attributed to the country’s rising debt.
It downgraded the issuer rating of the Kenya government to B2 from B1 but assigned a stable outlook, implying that the probability of the government defaulting on its loan obligations is increasing and that new loans would draw a higher risk premium.
Wrong signals
Foreign investors’ risk perception of the country has increased due to high-level corruption allegations that rocked the public sector, and the International Monetary Fund’s withdrawal of a $1.5 billion standby facility last year.
The IMF said there will be no more reviews for the programme that expired on September 14, 2018, after Kenya failed to meet some key conditions, leaving the economy exposed to shocks that erode forex reserves.
The conditions were scrapping the interest rate cap regime and imposition of a 16 per cent value added tax on petroleum products.
A cross-section of economists warned that the suspension of the programme would expose Kenya to higher yields in the international capital markets.
“While we have to acknowledge that Kenya currently doesn’t face a balance of payments crisis and has not since 2011 arguably, it’s never been about the money but rather the confidence the market, especially foreign investors, place on IMF involvement,” said Jibran Qureshi, an economist with Stanbic Bank Kenya.
The EastAfrican has learnt that foreign investors have started factoring in these developments in their pricing of Kenya’s foreign debt.
Sources told The EastAfrican that corruption in Kenya’s public sector, where millions of dollar’ worth of public funds have found their way into individuals’ pockets, and the IMF’s move to suspend its two-year budgetary support programme to the country have sent the wrong signals to the international investors, increasing their risk perception of the country.
The two-year (March 2016-March 2018) facility was approved by the IMF board to help Kenya deal with external shocks that distort the country’s balance of payments position.
The programme was extended in March 2018 by six months after Kenya was unable to complete its programme reviews due to the 2017 election.
Eurobond
Going by the yields on the second Eurobond of $2 billion issued in February 2018, things do not look any better for the government this time, which is in dire need of resources to implement President Uhuru Kenyatta’s Big Four Agenda projects covering universal healthcare, affordable housing, food security and manufacturing.
According to Bloomberg, the yields on the 10-year and 30-year Eurobonds have increased by 1.7 percentage points and 1.5 percentage points respectively since the issue date in February 2018.
The bonds are listed on the London Stock Exchange, with the 10-year one priced at a coupon rate of 7.25 per cent and the 30-year bond priced at a coupon rate of 8.25 per cent.
Analysts at Cytonn Investments said the increase in bond yields is a reflection of higher risk perception by investors.
In the sub-Saharan region, Eurobond yields have also been on an upward trend, partly due to the rise of interest rates in the US and a stronger dollar.
Efforts to obtain comments from National Treasury Cabinet Secretary Henry Rotichproved futile as our calls went unanswered and he had not responded to text messages by the time of going to press.
Forex reserves
Lawmakers have said that while the country’s forex reserves have increased significantly, ensuring exchange-rate stability, they may be depleted on account of maturing debt obligations in the current fiscal year.
The Kenya shilling, which is currently trading at close to Ksh102 against the dollar, may come under pressure against the greenback.
Kenya’s public debt is currently valued at more than Ksh5 trillion ($50 billion), with loans from China accounting for over 68 per cent of total bilateral lending, meaning it is the country’s biggest bilateral lender.
According to the PBO, Kenya faces maturing debt obligations as well as a higher import bill on account of government-related projects such as the standard gauge railway phase II.
Among the debts maturing within the 2018/2019 fiscal year is a syndicated loan of Ksh 78.7 billion ($787 million) from Standard Chartered Bank, a sovereign bond of Ksh78.3 billion ($783 million), a Trade Development Bank-syndicated loan of Ksh37.2 billion ($372 million) and an International Development Association loan of Ksh14.6 billion ($146 million).
There are also loans from China ($84 million), France ($76 million), Japan ($56 million) and Treasury bonds totalling more than Ksh150 billion ($1.5 billion).
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