Kenya's Treasury mulls fresh bond issue as it seeks Sh152b to patch budget deficit

Treasury Cabinet Secretary Henry Rotich reads the Budget speech in Parliament in June. The country’s financing gap currently stands at 9.6 per cent of GDP, up from 7.2 per cent last year. [PHOTO: FILE/STANDARD]

Kenya is considering taking up a syndicated loan or issuing a sovereign bond to raise as much as $1.5 billion (Sh152 billion) to finance the budget deficit.

American-based news agency Bloomberg has reported that the National Treasury is likely to tap into the international markets in the next three months and has invited banks to submit proposals on how it can raise the said amount.

The cash will also be used to boost foreign currency-reserves.

“East Africa’s largest economy will return to the international debt market in the first quarter of 2017, when it will either seek to secure financing through a commercial loan, bond or use a combination of the two, depending on what banks see as the best option to structure the financing arrangement, according to the person who asked not to be identified because they’re not authorised to speak on the issue,” reported Bloomberg.

Kenya raised $2 billion (Sh202 billion) Sovereign Bond in June 2014 and returned to the market for a Tap Sale of $750 million (Sh75.7 billion) in December.

ANOTHER RIP-OFF

Yields on the nation’s 10-year Eurobond climbed nine basis points to 7.85 per cent, which could indicate how much Kenya would pay if it were to tap the international market.

The development comes at a time when there are mounting concerns about the country’s piling public debt and when the opposition has raised queries about how proceeds of the 2014 Eurobond were used.

CORD leader Raila Odinga has claimed most of the cash was looted by corrupt government officials. It also comes at a time when it has been reported that Treasury is considering a second Eurobond, which Mr Odinga has claimed is another rip-off in the offing. Bloomberg reported that if a decision is taken to issue a bond, it would probably be targeted at private investors and that the debt instrument may attract 8.5 per cent to 9.5 per cent interest, depending on the length of tenure. The Government will announce a lead arranger next week, a second person with direct knowledge of the matter said, asking not to be identified because they are not authorised to comment publicly on it.

The country has an estimated financing gap equivalent to 9.6 per cent of Gross Domestic Product (DGP) this year, up from 7.2 per cent last year, according to the World Bank.

The country took up Chinese debt of $600 million (Sh61 billion) earlier in the year to pay for a $6 billion (Sh606 billion) budget deficit that the government expects this year.

Kenya had an overall shortfall between revenues and expected expenditure of Sh570.2 billion, of which Treasury wanted to borrow Sh340.5 billion internationally and Sh229.7 billion domestically.

However, rates on government paper have been significantly lower after a prudent borrowing calendar by the Central Bank of Kenya (CBK) and over-subscription by investors after the interest rate cap law allowing Treasury to borrow more from the domestic market. This prompted Treasury to review its portfolio, saying it will raise its borrowing from the domestic market for the fiscal year from July to Sh294.6 billion from its initial target of Sh229.7 billion. The country’s foreign reserves have also dipped to 4.8 months of import cover at $7.3 billion (Sh737.3) with CBK expected to pay part of the Eurobond coupon this month, which is expected to eat into the reserves.

This leaves the CBK with less money to cushion the shilling although Kenya can still tap into the $1.5 billion (Sh153 billion) IMF precautionary loan that can be utilised in two years.

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