Ruto's Eurobond gamble pays off as debt plan gets global backing

President William Ruto. [File, Standard]

President William Ruto’s cash-strapped administration’s plan to raise billions of shillings of new debt from international investors has paid off but at a steep price after Kenya’s Eurobond plan got plenty of demand from global investors.

The move potentially averts a potential full-blown crisis in June this year – just five months away  - when the 10-year Eurobond worth Sh320 billion ($2 billion) is due for repayment.

Kenya got Eurobond bids of Sh960 billion ($6 billion), underlining huge investor interest, the Government said yesterday.

Ruto had previously sought to assure global investors that Kenya will not default on its debt. “I can now state with confidence that we will and shall pay the debt that has become a source of much concern to citizens, markets and partners,” he had said.

And yesterday, the National Treasury said: “Kenya received strong demand, with a high-quality order book exceeding $6 billion, allowing for tighter pricing and an increased issuance compared to initial guidance,” said National Treasury Cabinet Secretary Prof Njuguna Ndung’u.

“The proceeds from the 2031 Eurobonds will fund the offer to buy Kenya’s existing $2 billion Eurobonds due in 2024.”

The latest plan had been seen as an acid test for the Kenya Kwanza government’s ability to repay the massive public debt, experts had earlier told The Standard.

“The combined transactions are a crucial part of the government’s strategy to smoothen the maturity profile of the 2024 Eurobonds and proactively manage debt liabilities,” said Prof Ndung’u.

“The remaining portion of the 2024 Eurobonds not purchased in the Tender Offer will be funded through a mix of government funds and financing from multilateral and bilateral sources, including bank syndication.”

News of the performance of Kenya’s debt call coincided with the Shilling strengthening against the dollar on Tuesday according to an official rate provided by the Central Bank of Kenya (CBK) which could ease pressure on the raging economic crisis.

Yesterday the banking regulator posted the shilling at a new high of 158.66 per dollar, up from recent record lows of Sh160. With US interest rates on a sustained rise, the inevitably higher borrowing costs did little to alleviate pressure on the Kenya debt call, however.

Successful pricing

Data showed investors got a 10.375 per cent yield compared to the 6.875 per cent on the bonds the government was replacing.

“The government is pleased to announce the successful pricing of a new 9.75 per cent $1.5 billion Eurobond due in 2031,” said Ndungu.

“This will amortise in three equal instalments in 2029, 2030 and 2031, resulting in a weighted average life of 6 years. The 2031 Eurobonds have an issue price of 97.270 per cent, yielding 10.375 per cent.”

Kenya cancelled a similar planned $1 billion (Sh160 billion) Eurobond in mid-2022, leading to pressure on foreign exchange reserves and more rapid exchange-rate depreciation, which pushed up the cost of foreign debt servicing. Overseas investors have been closely monitoring Kenya’s strategy amid jitters about the possibility of a default.

The gamble came at a time when the country’s falling hard currency reserves, a steep weakening of the shilling and revenue challenges had raised questions about Kenya’s ability to pay off the bond.

In May 2019, Kenya raised $2.1 billion (Sh320 billion) from international capital markets to pay off other loans, including a $750 million Eurobond that matured on June 24, 2019, and other debt obligations.

Recently, President Ruto announced that Kenya would continue diversifying its sources of income.

The government recently entered into a partnership with a Japanese government-owned insurance company to issue a Samurai bond valued at $500 million.

A Samurai bond refers to a bond issued in Japan, denominated in yen.

Several global lenders including the International Monetary Fund (IMF), the World Bank, the African Development Bank (AfDB), the Africa Export-Import Bank (Afreximbank) and the Trade Development Bank (TDB) have pledged billions of dollars in a new liquidity lifeline for the government to settle its maturing obligations amid mounting concerns about Kenya’s repayment ability.

The National Treasury earlier admitted that Kenya’s headroom for more public borrowing is narrowing.

Treasury Cabinet Secretary Njuguna Ndung’u said this is compounded by lower-than-expected revenues that could impact the government’s ability to deliver on its ambitious bottom-up promises.

“The economy faces two extreme constraints: financing constraints as tax revenues generated cannot finance the development we wish to have, and on the other extreme we have limited headroom for debt,” he said earlier.

“We are choked with inherited debt that must be paid.”

Public debt has hit the Sh11 trillion mark, according to the latest estimates, as both domestic and external liabilities rise rapidly.

President William Ruto’s revenue plan is also yet to gain momentum as tax collection has been falling short of the government’s target.

A random examination conducted by The Standard on various economies like Greece, Zambia, Lebanon, and even Argentina reveals that a default could initiate an economic downturn in unprecedented ways.

In the event of a default, credit rating agencies would further downgrade the country.

This would see Kenya isolated from the international credit market.

The decline in investor confidence, limited credit availability, and higher borrowing costs would then significantly impact Kenya’s business environment and limit consumer spending.

Additionally, the resultant budget constraints arising from default can trigger an economic crisis and lead to an increase in the unemployment rate, a decrease in government revenue, and a reduction in essential public services like health, new roads and education.