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With new Eurobond in the bag, will Kenyans get value for money?

By Dominic Omondi | May 19th 2019 | 6 min read
By Dominic Omondi | May 19th 2019

Rami Toren from Green Arava in Israel view some of the maize plantation in a ten thousand hectares model Farm of Galana Kulalu Food Security Project which was officially launched by President Uhuru Kenyatta at the Galana Kulalu Irrigation Scheme, July 09, 2015. [Gideon Maundu/Standard]

After being told the government had successfully issued a third Eurobond, Kenyans might now want to shift their focus to the value of the projects that will have gobbled up Sh685 billion in five years.

Right from 2014 when Kenya issued its debut sovereign bond, the money raised from the mostly European and American investors has partly been used to refinance other maturing debts while the rest has been used for general budgetary expenditure.

Experts reckon that refinancing -- offsetting one debt using another -- is not unusual, even in corporate finance. However, it is prudent to replace an expensive debt with a cheaper one, probably a short tenor debt with a long tenor debt or high interest loan with a low interest one.

Treasury insists this is what it has been doing with its refinancing. But its critics differ, pointing to the shortening of tenors and the increase in the cost of borrowing.

Last week, the government raised $2.1 billion (Sh210 billion) which was issued in two tranches of seven- and 12-year maturity, attracting interest of seven and eight per cent respectively.

Most analysts agree that Kenya got a favourable deal at a time when global investors are jittery following a trade spat between the United States and China.

Moreover, the country successfully sold the bond despite not having a stand-by credit facility from the International Monetary Fund, which expired in September last year, leaving the country without an additional insurance in case of shock to the Shilling.

“If Kenya had gone to the market a month before, around that time when Ghana and Egypt issued their Eurobonds, it would have got a better deal,” says Jibran Qureishi, the Stanbic Bank Regional Economist for East Africa.

He adds that Kenya could even have got a longer tenor note, probably for 30 years.

Although all financial experts we spoke to agreed that the terms for the 2019 sovereign bond were favourable, they differed on whether the projects that have taken up the money raised from the international capital market will generate sufficient returns to repay interest that is increasing.

Increased appetite for costly dollar-denominated debts such as the Eurobonds -- as well as financing offered by a group of lenders known as syndicated loans -- has dramatically pushed up Kenya’s interest payments, with foreign investors pocketing a good chunk of the country’s tax revenues.

In fact, when Kenya made its first interest payment on its debut sovereign bond in June 2015, total foreign interest that had hitherto been increasing at an average of 6.5 per cent suddenly jumped by a staggering 96 per cent as the country forked out Sh29.3 billion to foreign creditors, compared to a pay-out of Sh14.9 billion in the 2013/14 financial year.

It was the highest jump in 15 years.

Henceforth, interest payment on external debt would increase by an average of 51 per cent, attracting the attention of the IMF.

In Kenya’s debt sustainability analyses (DSA), the IMF found that an increasing load of foreign interest payment was one of the factors that nudged the country to the edge of debt distress as it risked defaulting on its obligation.

The global lender thus reclassified Kenya’s risk of default from low to moderate, with Kenya joining 25 nations including Congo Republic, Burkina Faso, Liberia, Sierra Leone and Togo in this category.

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one fifth of revenue, placing Kenya in the top quartile among its peers”, the IMF said in the report released in December 2018.

Asset generating

Economists say that while taking on expensive debt is not necessarily bad, borrowers (country or company) have to ensure that they invest the money in asset-generating projects.

Such projects would significantly boost the country’s productivity by, for example, increasing its yield of tea, coffee, pyrethrum and other export products.

Improved productivity of the country’s exports would translate to more foreign exchange earnings, which Kenya would use to comfortably repay its share of commercial loans as they fall due.

Efforts to rebuild the country’s tourism sector and diversify its exports would also go a long way in earning the country critical foreign currencies, particularly US dollars, which is the currency under which the three Eurobonds have been denominated.

Yet, some analysts feel that some of the projects Kenya has invested in will not have the desired knock-on effect.

“The money that Kenya has borrowed has not gone into projects that generate revenue,” says Deepak Dave of Riverside Capital Advisory. 

While the multiplier effect of some of the projects might take long to felt, there has been concern over the last few years about the mismatch between economic growth and revenue growth.

“Tax to GDP (Gross Domestic Product) has been reducing,” says Erick Musau, a senior research analyst at Standard Investment Bank.

The World Bank also noted that even though more goods and services have been traded, very little of these economic activities have been taxed.

“Although it (revenues) grew by 13.3 per cent in nominal terms in 2016/17, tax revenues expanded by less than nominal GDP 14.9 per cent, hence the tax-to-GDP ratio fell to 16.9  per cent of GDP - its  lowest  level in a decade,” said the bank in its 16th edition of the Kenya Economic Update.

The decline has been seen as a sign of a moribund private sector, the main employer and taxpayer whose success is critical for Kenya’s efforts to repay its loans. Unfortunately, a good chunk of households and firms have remained outside of the tax bracket as more than 80 per cent of the economy has remained informal.

“You can’t have 90 per cent of the economy being informal and expect to increase your revenue,” Mr Musau says.

Mr Dave insists that rather than pump money into mega projects such as the Standard Gauge Railway, money would have been put into micro-infrastructure projects which connect to the real economy that touches more citizens.

A number of these projects have already been tainted by scandals. From the SGR to dams, there have been numerous reports of how borrowed cash is being misappropriated.

Musau however says that despite the taint of corruption, the scale of the projects being undertaken is substantial and will pay off at some point.

He says that unlike during President Mwai Kibaki’s tenure when the only prominent mega project was the Thika Superhighway, President Uhuru Kenyatta’s government has “overstretched itself” in terms of the scale of projects.

The projects built across the country in the last five years span different sectors; from energy, roads, ports, dams to ICT among others.

“But they could be implemented better,” Musau says.

Mr Qureishi says the government needs to enhance feasibility on the projects it is doing to ensure substantial return on the projects.

The National Treasury has since come up with a public investment management framework to verify the projects for their quality and cost-effectiveness.

Without the framework, noted The Treasury, there is a likelihood of ad-hoc decisions on project funding.

“The result is a bloated project portfolio, unpredictable funding, stalled projects and inflated costs, contributing to the under-execution of budgets and delayed translation of the investment in projected economic growth,” said Treasury in the 2018 document.

Stringent conditions

Treasury has also revamped the Debt Office and given State bodies stringent conditions on external financing as a means to ensuring there is value for the billions borrowed.

“The National Treasury’s authority to sanction any new project in accomplishment of Kenya’s Vision 2030 and the government’s Big Four Development Agenda must be demand-driven and priority to the Kenyan people,” said Treasury Cabinet Secretary Henry Rotich in a circular on seeking external funding.

“This will ensure adherence to the principles of public participation as enshrined in the Constitution of Kenya to ensure sustainability of the projects.”

Realising that some State agencies kept holding money even as some projects stalled, President Kenyatta in June last year ordered a freeze on procurement of all new development projects until the ongoing ones had been completed. It is a directive that National Treasury insisted would continue being implemented in the upcoming financial year.


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