Global investors offered a record $8.8 billion in bids for Kenya’s 5- and 10-year Eurobonds this month. The country issued $0.5bn in the 5-year bond at 5.875% and $1.5bn in the 10-year at 6.875%. The resounding success is likely to encourage more African governments to speed up plans to come to international markets for credit while cheap global rates continue and appetite is high for frontier markets debt.
This is Africa’s biggest Eurobond issue to date. According to the BBC, investors from the US took about 67% of the issue and UK investors about 25%. Bond rates on Kenya’s 10-year debt in issue came down since the new issue was first announced on 16 June to 6.41% which is 381 basis points over the similarly dated US treasuries, according to Bloomberg.
President Uhuru Kenyatta was reported on Reuters telling a news conference: “By accessing these external funds, we will reduce government borrowing from the domestic markets, thereby helping drive down interest rates which should boost investment, spur economic growth, provide more employment opportunities to our people.” He described the sale as “a vote of confidence”. At a state of the economy address on 25 June he said the funds would be used prudently to fund infrastructure including transport and energy and to fund agriculture.
Cabinet secretary for the National Treasury (equivalent to Finance Minister) Henry Rotich said: “Investors were impressed with the management of our economy and perceived it to be very strong.” He said it would diversify government’s financing for development programmes. He also said the Government would come back to the markets in the next fiscal year (starting 1 July) but may consider a sukuk bond (see here for UK’s £200 million sukuk bond success) or a diaspora bond. The sovereign is also set to be a benchmark for Kenyan firms issuing corporate bonds on international markets, similar to the success of Nigeria’s sovereign issue.
Rotich said that from 8 July the Central Bank of Kenya would start setting a new reference rate for banks, the Kenya Banks Reference Rate. Banks would have to use this, although they would still be able to add risk premiums according to the creditworthiness of borrowers. This is also expected to lower interest costs and the rate would be set according to the average of the CBK’s main lending rate and the average yield on benchmark 91-day Treasury Bills every 6 months.
The Government announced its 2014/15 budget this month and forecast a budget deficit of 7.4% of gross domestic product (GDP) and local borrowing of KES190.8bn ($2.18bn) or 4.1% of GDP, according to Reuters. Macro-economist Rotich was a colleague when Kenyatta was Finance Minister and the two are working together to speed up Kenya’s economic growth to over 10%. According to a story in the Financial Times blog Beyond Brics, Rotich says Kenya will grow at 5.8% this year and 6.4% next year, however the World Bank has just cut its forecast from an earlier 5.3% forecast for this year and forecasts 4.7% for both years.
The blog cites the World Bank report: “The new projections reflect the effects of the drought, the deteriorating security situation, the low level of budget execution, and tighter global credit as the US Federal Reserve winds down its expansive monetary policy.”
The World Bank says drought has cost Kenya $12bn over the last 10 years and that foreign direct investment (FDI) is only 1% of GDP. The blog reports: “The World Bank is also increasingly preoccupied by the impact of inequality on growth and stability.” The World Bank is optimistic and is backing Kenya with a $4bn programme, double the Eurobond.
Kenya plans $43bn of infrastructure by 2017, but there are questions as to whether they get value for money in a $3.7bn deal with Chinese for new rail and rolling stock. Kenya is likely to become a middle-income country by September after re-basing because of statistical revisions.