Kenya, in a Corner, Presses On With Eurobond Plan as Yields Rise

It could cost the country, which is approaching an election in August and whose debt is at high risk of distress, according to International Monetary Fund. Yields on benchmark 10-year notes have almost doubled since January to 11.22%, suggesting investors will demand a hefty premium for new issuance.

East Africa’s biggest economy needs to plug a budget deficit projected at 8.1% of gross domestic product in the year through June, at a time when economic growth is slowing and spending pressures are rising ahead of the vote. Meanwhile, foreign-exchange reserves are dwindling as the central bank shores up the currency, which is at a record low against the dollar.

“It is not an ideal time to be going to market,” said Yvonne Mhango, Renaissance Capital’s head of research for Africa. “Kenya may need to pay up to garner interest, which implies a costly issuance.”

Domestic financing, bank loans or concessional loans from multilaterals could be alternative sources of budget financing, Mhango said. But with $2 billion of eurobonds maturing in June 2024, the country will need external financing too, according to Moody’s, which rates Kenya’s foreign debt B2, or five steps into junk, with a negative outlook.

“While the government has alternatives in the near term, its ability to roll over its $2 billion 2024 maturity will rely on its ability to issue a eurobond because such a sizeable maturity would be difficult to meet from domestic sources, as well as drain FX reserves,” said David Rogovic, vice-president and senior analyst at Moody’s.

The government still intends to tap the market before the end of June, Treasury Secretary Ukur Yatani said last week, even after his department expressed concern in a document that rising global yields meant borrowing might be too expensive at this time.

Declining Issuance
Other emerging-market issuers are holding off as rising U.S. yields and risk aversion due to the war in Ukraine push up borrowing costs. Emerging-market eurobond issuance declined by 37% in the first quarter compared with last year, according to Moody’s Investors Service. Sales from Africa and the Middle East dropped by more than half.

Kenya’s “timing is out of necessity rather than preference,” said Connor Vasey, an analyst at Eurasia Group. Absent significant belt-tightening or cheaper financing sources, the need to balance the books by end-June is a constraint for the Treasury, he said.

President Uhuru Kenyatta, who is due to retire, is racing to wrap up legacy infrastructure projects in farming, housing, manufacturing and universal health care. Growth is seen slowing down to 6.7%this year after expanding at the fastest pace in more than a decade in 2021.

The world’s biggest exporter of black tea has seen its eurobonds shed 19.2% this year, the worst performance among African sovereign borrowers and on par with Sri Lanka, which is close to default. 

“The pricing prospects of June’s Eurobond are not rosy for the Kenyan government,” said Benjamin Hunter, an analyst at risk consulting firm Verisk Maplecroft.

Source: Bloomberg Business News