Kenya set to receive Sh174 billion Euro bond on Tuesday

Nairobi, Kenya: On Tuesday, Kenya will receive Sh174 billion secured through floating of a sovereign bond, after it was oversubscribed to the tune of Sh700 billion. The over-subscription, which is four times of what the Government wanted, sets the country on a historic feat in the whole of Africa.

And there were about six reasons that propelled the country’s interest to levels never experienced by an African country.

Key among them is the favourable rating Kenya got from International credit rating agencies Standard and Poor, Moody’s and Fitch, which gave the country B+ credit rating.

Sources who sought anonymity because the Government is not allowed to comment on the matter in the media until the transaction is complete, said a stable economic outlook showing improving economic prospects equally contributed heavily to this outcome.

“Kenya has been deemed to now have the capacity to meet its financial obligations within the comity of nations,” the source said.

Other factors that played a big role during the negotiations include International reserves held by the Central Bank, which are expected to rise to the recommended target of four months of imports towards the end of 2014.

Future growth in old and new commodity revenues such as oil, gas and coal underpin future leaps in economic growth and foreign exchange gains and the country’s stable relatively stable inflation.

A Government bond is issued with a promise to pay periodic interest payments and repay the face value on the maturity date.

Government bonds are usually denominated in the country’s own currency but bonds issued by national governments in foreign currencies are normally referred to as “sovereign bonds”.

Creditworthy

The terms on which a Government can sell bonds depend on how creditworthy the market considers it to be. This creditworthiness is determined by International credit rating agencies.

A credit rating affects the interest rates a security pays out, with higher ratings leading to lower interest rates. The issuers of the securities (bonds) may be companies, special purpose entities state and local governments, non-profit organisations, or sovereign nations.

Senator Beatrice Elachi said the facility will significantly push interest rates for local borrowing downwards, a factor, she said, will benefit local investors borrowing from local banks.

“Borrowing from the foreign market where interest rates are low and not from the higher interest domestic market will help push down lending rates in the domestic financial market .

The budget/fiscal deficit in Kenya of KES 342 billion is substantially covered ($2 billion/ KES 174 billion raised by the Eurobond) by the sovereign bond and KES 168 billion from domestic borrowing, so the economy will not stop or stagnate but in-fact thrive,” said the Senate Majority whip. The Eurobond secured by Kenya is for 10 years and the principal amount will be repaid on the maturity date which is in 2024.

By that time, the government expects the economic multiplier factor created by new infrastructure will comfortably cover the repayment upon maturity and earn the economy revenue long after the repayment.

However, Senator Billow Kerrow said the Government must use the money prudently because the debt burden has been significantly raised adding the interest rates for local borrowing will reduce because Government is not borrowing locally.

Favourable rate

“There no risk of default because this is Government. The interest rate is favourable. Kenya’s economy is generally perceived to be strong.

Is true if this money is obtained interest rates would come down drastically as the Government would not be looking for money in the local market and the banks would be forced to lend to individuals at low rates,” said Kerrow.

Nominated MP Johnson Sakaja said the bond will significantly cover the gaps in recurring annual expenditure among other benefits.

“Gaps in recurring annual expenditures will now be covered hence averting crisis such as strikes due to non-payment of wages. Secondly, The sovereign bond has been borrowed using the Dollar as opposed to the local Kenya shilling.

This ensures more stability as the Dollar does not suffer from wild fluctuations which could otherwise adversely affect the Kenyan economy in the long-run.

It is prudent to understand that now, there is no risk of the Government printing more money to pay interest or repay the debt which could happen if the bond was in Kenya Shillings which could expose Kenya to hyper-inflation and currency devaluation,” he said.

Elachi said the fact the Kenyan Eurobond was over-subscribed shows investors have confidence in the Kenyan economy.