Jittery global investors now dump Kenyan dollar bonds

Dollar security. [Getty Images]

Kenya's debt troubles look set to pile as jittery foreign investors spooked by political and economic challenges shy away from the country's dollar bonds.

This came as the yields on Kenya's Eurobonds rose sharply amid mounting political uncertainty and officials admitted acute challenges in honouring sovereign debt obligations.

Preference by foreign investors for safer Western bonds now puts in doubt Kenya's plan to issue new debt, analysts cautioned.

The extra yield investors demand to hold Kenya's dollar bonds over US Treasuries indicated a rise to 1,019 basis points on Monday, above the 1,000 level widely considered by bond traders as distressed, reported Bloomberg News.

The bonds yielded 993 basis points at the close on Friday, according to a JPMorgan index, added Bloomberg. Yields on dollar bonds due 2028 also climbed to 14.6 per cent, on track for a 14th consecutive day of increases, the longest streak since the securities began trading in 2018, according to the data compiled by Bloomberg.

The general increase in anxiety over possibilities of default and resultant risk aversion were key to this development, analysts told The Standard.

State House's top economic adviser Dr David Ndii recently said that the government is facing an acute cash crunch amid the unprecedented salary delays for civil servants at both the national and county levels.

To demonstrate the magnitude of the crisis, Dr Ndii revealed that President William Ruto's administration avoided a default on its sovereign debt obligations without divulging additional details on the economic risk.

A default is a failure by a country's government to pay its debt and has grave financial implications for the economy. Deepak Dave of Riverside Advisory said yesterday a sustained sell-off would affect Kenya's ability to refinance maturing obligations.

"Slowly, trade finance becomes more expensive hence imports slow down; currency continues to depreciate; at some point, refinancing doesn't happen and the government of Kenya is forced to freeze payments and budgetary payment," he said.

The bonds will face another stability test beginning next week as the opposition vows to return to mass rallies around the country to protest the high cost of living and last August's disputed presidential polls.

There is also a general rise in regional geopolitical risks following the ongoing Sudan political crisis.

"As Sudan spooks unfamiliar international investors, already wary of the suddenness of African internal conflict, Kenya is wrongly lumped in alongside given its geographic proximity," said Mr Dave.

He said Azimio la Umoja's mass action push "will make things worse for the government as it tries to grapple with debt management."

The sell-off comes on the back of narrowing borrowing options that have locked the National Treasury out of both domestic and global capital markets, laying the ground for a looming debt crisis. The government is already on the brink of missing its revenue collection target for the current financial year that ends in June, State data shows.

Treasury revealed recently it is considering tapping into the international capital markets with a fourth Eurobond issue in less than eight years to help pay off part of its debt obligations.

Kenya is, however, likely to set itself up for costlier debt if it implements the Eurobond plan in the near term, said analysts. This is against a backdrop of weaker credit rating by global rating agencies.