Kenya goes for costly Eurobond to pay off maturing $8.5b debts

Kenya’s National Treasury is considering tapping into the international capital markets with a fourth Eurobond issue in less than seven years to help pay off part of its debt obligations estimated at Ksh925 billion ($8.48 billion) in the next three months.

This comes against a backdrop of weaker credit rating by global rating agencies pointing out that Kenyan tax payers will have to dig deep into their pockets to service the planned loan.

The three global rating agencies — S&P, Fitch and Moody’s Investor Service — have downgraded the country’s credit status largely due to its faster than expected accumulation of debt against falling revenue collection and staggering economy raising fears of the possibility of a debt distress.

This will mean investors willing to buy the Kenyan bond in the international will demand risk premium to cushion against country’s risk of default.

“All sovereign ratings have been downgraded on account of this Covid-19 pandemic and countries still access the international financial markets. A downgrade does not mean that your access to the market has been limited,” Haron Sirma, the Director-in-charge of Debt Management at the National Treasury told The EastAfrican last week.

Significant risks

However, Dr Sirma could not disclose the amount the country will borrow through the Eurobond, stating that the amount would be determined once the parliament considers and approves the supplementary budget for the current fiscal year (2020/2021).

“You know we are going through the supplementary budget now so may be it is when parliament has considered and approved the supplementary budget that is when we shall start the process (issuing a Eurobond bond),” he said.

Last week S&P downgraded the country’s credit rating to ‘B’ from ‘B+’ citing the significant risks to the government’s fiscal consolidation plan, as external indebtedness remains high.

Last year the agency revised Kenya’s outlook to ‘negative’ from ‘stable’, citing the adverse impact of the coronavirus pandemic on the weak public finances and gross domestic product growth.

Then, Moody’s changed the country’s outlook to negative from stable reflecting the rising financing risks posed by the huge borrowing needs.

In May 2019, Kenya raised $2.1 billion from international capital markets to pay off other loans including a $750 million Eurobond that matured in June 24, 2019 and other debt obligations.

The bond was issued in two tranches of seven-year tenor and 12-year tenor priced at seven per cent and eight per cent respectively.

In 2014, Kenya issued a $2 billion Eurobond and tapped for a further $750 million, while the second Eurobond of $2 billion was issued in February 2018.

According to a report by Kenya’s Parliamentary Budget Office (PBO) titled Evading Recessionary Pressure Under A Mounting Debt Burden, the debt service (debt principal and interest payments) will cross the Ksh1 trillion ($9.17 billion) mark in the next financial year (2021/2022) starting July 1 2021 while repayment expenditure, estimated at Ksh925 billion ($8.48 billion) in the current fiscal year will reach Ksh1.02 trillion ($9.35 billion) by the end of 2021/22.

Low revenue collection

Kenya’s public debt stock amounted to Ksh7.12 trillion ($65.32 billion) as at the end of September 2020 accounting for 65.6 per cent of GDP s on account of expenditure pressures related to infrastructure and debt servicing, coupled with decline in revenue generation.

“This trend is projected to continue over the medium term as the expansionary economic blueprint, the need for fiscal stimulus and debt servicing continues to drive expenditures even as revenue generation remains low and the economy continues to underperform,” according to the PBO.

In the current fiscal year (2020/2021), debt is forecasted to reach Ksh7.8 trillion ($71.55 billion) and will account for approximately 69 per cent of GDP.

Interest payment on debt as a share of tax revenue doubled between 2013/2014 fiscal year and 2019/2020 fiscal year.

Over this period, interest payment on domestic debt as a share of tax revenue increased from about 14 per cent to 23 per cent while interest on external debt increased from two per cent to nine per cent partially driven by higher borrowing costs as Kenya gradually borrowed more commercial external loans.