IMF report: Kenya’s ‘addiction’ to foreign markets for financing risky

Kenya is one of the many emerging and frontier markets that are increasingly turning to global financing instruments, such as Eurobonds, to fund their public sectors, thus exposing themselves to external shocks, says a report by the International Monetary Fund (IMF).

Emerging and frontier markets are already grappling with volatile sovereign spreads (the difference between the yield on a country’s bond issue and the yield on a comparable bond issued by a benchmark country, such as the United States or Germany); elevated current account deficits; and deterioration of fiscal balances, added the IMF.

“These developments together have increased frontier markets’ vulnerability to abrupt changes in market sentiment that could lead to sharp increases in the future cost of financing or acute market pressures where foreign investors have significant stakes in domestic sovereign debt.”

The Regional Economic Outlook report gives the example of Cote d’Ivoire’s $1 billion (Sh102.4 billion) Eurobond in February 2015, which was almost 100 basis points more expensive than its first issue in October 2014.

“A depreciation of the exchange rate would exacerbate such costs. In fact, should currencies continue to depreciate against the dollar for an extended period... borrowing in foreign currency may turn out to be more expensive than borrowing in domestic currency,” noted the IMF.

Since Kenya went for the Eurobond last year in June, the shilling has significantly weakened against the dollar, hitting a low of Sh106 against the greenback in September, and down about 13 per against it this year. In June 2014, the exchange rate was Sh87.

Revenue prospects

A government bond, or sovereign bond, is a debt instrument issued by a government generally with a promise to pay interest periodically and repay its face value on the maturity date. Should trends in the exchange rate continue against the shilling, then Kenya is likely to repay more than the face value of its bonds on maturity.

In its report, the IMF notes that an increasing number of countries in sub-Saharan Africa are accessing global financial markets, with the outstanding stock of Eurobonds having grown almost four-fold in the last five years.

“While such financing is key for sub-Saharan African countries as they seek to address their urgent public investment needs, the concern is that in a number of countries, these capital inflows may have become a regular source of financing for the public sector,” said the fund.

“In this context, a key question is whether the yields and volumes evidenced in recent years’ bond and equity flows to sub-Saharan Africa were consistent with market conditions and market fundamentals, and if not, whether they are now more closely aligned.”

Kenya’s spending of its $2 billion (Sh204.8 billion) Eurobond has sparked widespread controversy. Mohamed Wehliye, a financial risk manager, in a recent interview with The Standard, expressed fears that the money, contrary to initial promises, may have been used to fund such recurrent expenditure as the Constituency Development Fund.

However, appearing before the National Assembly’s Public Accounts Committee (PAC), Treasury Cabinet Secretary Henry Rotich said the country first repaid a syndicated loan of about Sh61.2 billion that was due in July last year — a loan that had been through “a painful last-minute three-month extension in mid-August”, according to the Financial Times.

It also used the money to settle commissions owed to the arrangers of the Eurobond, and disbursed Sh196.9 billion to 14 ministries, departments and Government agencies.

When raising the money last year, the Government had said it would use the proceeds for general budgetary spending, with a focus on grand infrastructure to boost economic growth.

The country later went back for an additional Sh67.8 billion, riding on the positive response it received from international markets.

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