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Kenya expected to sell $2bn of eurobonds as public debt rises

Kenya has borrowed heavily from China to fund a $4.8bn railway scheme, the country’s largest infrastructure project since independence in 1963

Kenya looks set to sell $2bn of eurobonds as soon as Wednesday May 15, raising questions about the east African country’s ability to service its mounting debt burden.

Kenya is expected to sell a 12-year bond and a seven-year-weighted average-life security — its third such issuance in five years — partly to repay a $750m eurobond due to mature in June. It has dropped plans to issue a 31-year tranche it had marketed.

Kevin Daly, emerging market bond fund manager at Aberdeen Standard Investments, said he expected the 12-year bond to price at about 8 per cent, above the 7.25 per cent coupon a 10-year bond Kenyan bond carried when the country last came to the market in February 2018.

Public debt has risen to close to 60 per cent of national output, up from below 40 per cent in 2013, as Kenya has borrowed heavily from China to fund a $4.8bn railway scheme, the country’s largest infrastructure project since independence in 1963.

As a result, Kenya’s debt service-to-government revenue ratio will top 33 per cent this year, according to the Nairobi-based Institute of Economic Affairs.
With half the debt pile in foreign currencies, some analysts are sounding alarm bells about the Kenyan shilling, which the IMF said last year was 17.5 per cent overvalued in real terms and which has remained largely flat against the dollar since, despite inflation hitting 6.6 per cent in the year to April.

“Kenya’s debt worries have been building for some time,” said John Ashbourne, senior emerging markets economist at Capital Economics.

“Pressure on the currency will probably grow this year as a poor harvest pushes up food imports and puts pressure on the current account deficit. Were the currency to weaken against the dollar, the foreign debt burden would rise sharply.”

However Mr Daly attributed the likelihood of a higher yield to a broader souring of sentiment towards emerging markets, as well as rising supply, rather than any deterioration in Kenya’s economic fundamentals.

“I don’t think you can argue that the credit has deteriorated that much; it’s just that the market has changed,” said Mr Daly. “We saw a lot of issuance from sub-Saharan Africa last year and a little bit this year, so there is added supply there.

“[Kenyan] growth has rebounded above 6 per cent [following a drought], the fiscal deficit is going in the right direction, import cover is the highest it has ever been and the current account deficit is declining and is financed by FDI [foreign direct investment] and remittances,” he added.
Lucie Villa, vice-president in the sovereign group at Moody’s, which downgraded Kenya to B2 with a stable outlook last year due to a long-running rise in debt and decline in government revenues, said the eurobonds would aid Kenya’s foreign exchange liquidity.

“However, in time its increased reliance on external commercial debt would come at the expense of higher exchange rate risks and interest payments for the government, aggravating an already large and persistent fiscal deficit,” said Ms Villa.

A new income tax bill, currently before the National Assembly, should increase the tax base, reducing Kenya’s debt service-to-revenue ratio, Mr Daly said.

One other potential concern are doubts as to whether Patrick Njoroge, the highly rated governor of the central bank, will be reappointed when his first term expires next month.

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