Why Kenya might not issue another Eurobond
By Dominic Omondi
| May 23rd 2022 | 4 min read
Capital goes where the returns are high. Since Kenya plunged into the international capital markets to raise money by issuing Eurobonds, foreign investors - especially those from North America and Europe - were attracted by the high returns.
The interest rates offered by Kenya - like many other countries from emerging and frontier markets - were higher compared to those in advanced economies like the US and Europe.
But now, the National Treasury seems to be rethinking its decision to issue its fifth Eurobond.
“The international capital market conditions are unfavourable, with elevated yields on traded securities and there is a likelihood of not issuing Eurobond in the current fiscal year,” said the National Treasury in a report that was later pulled down.
Cabinet Secretary Ukur Yatani has since noted that Kenya will go ahead with its plans to issue a Eurobond of $1 billion (Sh116.5 billion) before the end of the current financial year in June.
But this might hurt. The yields on the Kenyan Eurobonds already being traded on the Irish and London stock exchanges have been rising, as investors sell off the bonds.
By the end of Friday, yields on Kenya’s Eurobonds rose by an average of 26.4 basis points.
Yields on the 10-year Eurobonds for Angola and Ghana also rose, an indicator the risk sentiment has gone up.
This means that Kenya is likely to pay high interest for the next round of issuance, which explains why the National Treasury was reluctant to go back to the international capital markets.
For a while, the country has been trying to lessen its debt repayment burden by going for cheap loans from multilateral institutions such as the International Monetary Fund (IMF), the World Bank and the African Development Bank.
This as Eurobond loans are restricted to high-yielding projects and cash management, according to a deal the country struck with the IMF.
By issuing the Eurobonds - a medium to long-term marketable securities sold in any major currency to investors throughout the world, except to investors in the issuing country - Kenya has not only received cash for budgetary support and infrastructural development but also critical dollars that have been used to shore up the shilling.
Suddenly, the flow of money from foreign investors into the country is drying up as central banks in advanced economies raise interest rates to slow down the pace of the increase in the prices of goods and services, or what is technically known as the inflation rate.
If anything, most of the foreign investors have been evacuating their capital from the country.
“Foreign portfolio outflows are driven by the rate tightening that has started gaining traction across major development banks,” said Mr Churchill Ogutu, an economist.
This has particularly been the case with equities — stocks and shares — traded at the Nairobi Securities Exchange (NSE).
Data from AIB-AXYS Africa, an investment bank, shows that foreign investors have been net sellers in the last few weeks at the bourse, with net outflows of Sh100 million on Friday compared with net outflows of Sh121 million in the previous session.
The capital flight is due to the tightening of markets in advanced economies, the ongoing war between Russia and Ukraine and the aftershocks of the Covid-19 pandemic.
This fact was captured by Tobias Adrian, the Financial Counsellor and Director of IMF’s Monetary and Capital Markets Department.
“Emerging and frontier markets now face higher risks of capital outflows,” said Mr Adrian in a blog he wrote on April 19.
He noted that the capital flight will vary across countries, depending on whether they net exporters or importers. Kenya is a net importer, which means it buys more from outside than it sells.
“Amid geopolitical uncertainty, the interplay of tighter external financial conditions and the US Federal Reserve normalisation (first-rate increase delivered in March and unwinding of the balance sheet expected to be faster), is likely to increase the risk of capital flight,” said Mr Adrian.
The capital flight is adding pressure on the shilling, which was trading at a historic low of 116.5 against the US dollar on Monday.
Foreign investors leaving the NSE are converting their wealth into dollars, a situation that has added to the scarcity of dollars in the Kenyan market.
Additionally, debt flows from the international capital market were for long critical for shoring up the Shilling as more dollars flowed into the country’s pot of foreign currencies.
Besides Eurobonds, foreigners also participate in the country’s domestic debt market. They held domestic debt worth Sh31 billion by the end of March, according to official data.
A big chunk of this debt was in fixed-rate bonds - a bond that pays the same level of interest over its entire terms - at about Sh19.3 billion.
They had also lent Sh10.5 billion through infrastructure bonds.
However, with the capital flight, foreign participation in the domestic market might decline.
The capital flight has also resulted in a rout of the cryptocurrencies, with reports indicating that a good number of Kenyans had put their money into cryptos compared with their peers in sub-Saharan Africa.
But most of them are counting losses due to the massive outflows from such cryptos as Bitcoin and Ethereum.
Already, there was very little cash coming into the country’s real estate sector, which is attributed to the negative effects of the Covid-19 pandemic and the jitteriness associated with elections.
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