Kenya to borrow Sh130b from banks after dropping Eurobond

National Treasury Cabinet Secretary Ukur Yatani. [Wilberforce Okwiri, Standard]

After abandoning plans to issue a fifth Eurobond, Kenya has turned to commercial banks to borrow $1.1 billion (Sh130.3 billion), a new International Monetary Fund (IMF) report shows.

The loan will be repaid using another Eurobond that will be issued in 2025.

It will be the first syndicated loan for National Treasury Cabinet Secretary Ukur Yatani since he took over the finance docket from Henry Rotich in 2018.

Mr Yatani had vowed to steer clear of expensive and secretive loans from commercial banks, and would only tap into sovereign bonds, including the Eurobond, for budgetary support.

However, due to the volatility in the global market, Eurobond spreads rose above 900 basis points by early June from below 500 basis points in mid-February.

This forced Kenya to abandon its plan to issue another Eurobond.  

“In light of the heightened volatility of market sentiment toward emerging and frontier markets, the planned financial fear 2021/22 EUR 1 billion Eurobond issuance has been replaced by $1.1 billion (Sh130.3 billion) of bank loans, assumed to be refinanced by a Eurobond issuance in 2025,” said the IMF in its country report for Kenya.

Market conditions

A higher yield means that investors would demand higher interest rates when Kenya issues a Eurobond.

“Given unsettled market conditions, staff welcomed the authorities’ pragmatic approach of adjusting their financing strategy considering the price and availability of commercial external borrowing, while paying due attention to the impact of financing choices on the debt profile,” added the IMF.

The new loan will push the country’s stock of commercial banks’ loans to Sh1.17 trillion.

As of June 2021, the stock of commercial bank loans stood at Sh1.04 trillion.

Citigroup Global Markets Deutschland AG has the most bank loans at Sh431.8 billion followed by Citigroup Global Markets Europe AG at Sh334.6 billion. Other major banks that have lent to Kenya include Trade and Development Bank, which is owed a total of Sh233.1 billion and Standard Bank UK (Sh1.3 billion).

Some of the bank loans, syndicated loans amounting to EUR305.4 million (Sh36.8 billion) claimed by a syndicate of Italian commercial banks in relation to the Arror, Kimwarer, and Itare dams projects, are disputed and subject to an ongoing arbitration proceeding.

Huge stocks of commercial loans, both from banks and sovereign bonds, have pushed up the country’s interest payments.

Interest payments as a percentage of total revenue have increased from 12 per cent in the 2013/14 financial year and are expected to hit 28 per cent by the end of the current financial year.

Commercial loans 

The sharp growth in interest payments is due to the contraction of expensive commercial loans such as the Eurobond and syndicated loans from banks and some of the Chinese loans like those from the China Development Bank.

These loans have interest rates as high as 10 per cent, shorter grace periods and tenors.

The IMF noted that additional commercial borrowing is budgeted for in the current financial year ending June next year. The biggest share of commercial loans, which also comprises bank loans, remains the Eurobond.

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