Time right for EA bond issuance after US retains stimulus plan

East African countries planning to issue bonds on the international market face favourable conditions in the coming months, following a decision by the US Federal Reserve Bank to continue with its monetary stimulus plan.

Following the announcement on Wednesday, long-term interest rates fell in the US and Europe, as short-term rates stabilised, potentially making it more profitable for investors to put their money in frontier and emerging economies like Kenya and Tanzania.

The two countries have been preparing to sell debt in international markets, but yields on debt issued recently by other African countries have been on an upward trend.

The Federal Open Market Committee (FOMC), a key organ of the Fed, said it would continue buying additional agency mortgage-backed securities at the pace of $40 billion per month, and longer-term Treasury securities at $45 billion.

Carmen Altenkirch, a director at FitchRatings said that Kenya now has an opportunity to sell its bond and pay interest at a rate comparable to other African countries.

“Now is a good time to issue… Issuing a Eurobond increases the investor base, reduces the risk of crowding out of funds and creates a benchmark for pricing,” said Ms Altenkirch at the Kenya’s Economic Successes, Prospects and Challenges conference held in Nairobi on Tuesday and Wednesday.

The conference was organised by the International Monetary Fund and the Central Bank of Kenya to highlight the country’s future economic potential ahead of the launch of its debut Eurobond. 

The Cabinet Secretary for the Treasury, Henry Rotich has already indicated that Kenya could sell between $1 billion and $2 billion’s worth of bonds in the international markets to finance major infrastructure projects, and to retire some of the country’s more expensive debt including a $600 million syndicated loan signed in May last year.

READ: Kenya seeks lead manager as it plans $1bn sovereign bond

FitchRatings in August affirmed a B+ rating with a stable outlook for Kenya, which shows that even though financial commitments are currently being met, there is a risk of default, while the capacity for continued payment is vulnerable to deterioration in the business and economic environment.

Tanzania is planning to issue between $500 million and $750 million Eurobonds, and has hired Citigroup as its advisor. It is, however, yet to get a rating from any of the international agencies.

Kitili Mbathi, the regional chief executive officer of Standard Bank said that $5.5 billion of African hard currency bonds have been issued this year, which shows there is still appetite for emerging market risk, and that there is a strong pipeline for new issues in the third and fourth quarters of this year.

Ratings

In July, Ghana received a B+ rating with a negative outlook. The country issued bonds worth $1 billion in August, paying a coupon rate of 7.875 per cent. Zambia, which issued 10-year bonds worth $750 million in September last year, received a similar rating.

In August, FitchRatings revised Rwanda’s B rating outlook to positive from stable, three-and- a- half months after the country issued 10-year bonds worth $400 million, paying interest at a 6.625 per cent coupon rate.

The ratings for Kenya, Ghana and Rwanda are, however, lower than Angola’s BB- rating with a positive and Nigeria’s BB- rating with a stable outlook.

Ms Altenkirch said that Kenya’s rating has been influenced by factors including the economic growth rate, ease of doing business, amount of foreign currency reserves and current account deficit, as well as the amount of government debt as a percentage of the economy.

Similar factors will influence the pricing for the country’s debut bond.

Kenya’s 5.7 per cent projected economic growth rate is, for instance, lower than that of Ghana, Rwanda, Zambia, Angola and Nigeria, which are expected to grow at 7.4, 7.7, 7.6, 7.8 and 6.8 per cent respectively.

The total amount of money available in Kenya’s economy, which is a positive for the country, is higher than in any of the other five countries.

“Kenya’s export base as a percentage of GDP has remained constant compared with Uganda. Foreign direct investment is less than one per cent and higher in other countries,” said Ms Altenkirch while cautioning on inappropriate use of the funds raised.

“If you do not put the money into infrastructure you may not see the kind of growth you need to pay,” she said.