Kenya’s debt financing pain far from over, experts warn
By John Otini, July 27, 2022Conditions for Kenya’s external financing improved for the first time in several months, after yields on Eurobonds dropped from an all-time high of 21 per cent to 18 per cent, Central Bank of Kenya (CBK) data shows. However, analysts warned that the situation could be the proverbial calm before a storm.
They attributed the change to the approval of $236 million (Sh28 billion) financing for Kenya last week by International Monetary Fund (IMF) which helped to slightly reduce the country’s gross external financing requirements.
“In the international market, the yields on Kenya’s Eurobonds declined by an average of 133.9 basis points, with the largest fall in yields (235.1 bps) for the 2024 maturity,” the central bank said in its weekly bulletin.
Kenya, Egypt and Angola are in the same moderately risky classification of countries in need of foreign funding compared to Tunisia, Ghana, Ethiopia, Argentina, El Salvador which are in acute need of external funding.
Total withdrawals
International Monetary Fund last week completed the Third Review under the 38-month programme approved in April 2021, bringing the total withdrawals from the programme to $1.2082 billion.
“As a result of this news, yields on Kenya Eurobonds fell from their all-time high recorded in the week ended July 15. For instance, yields on the 2024 Eurobond, which had spiked to an all-time high of 21.67 per cent on July 14, retraced to 18 per cent last week,” Mwango Capital, a financial research firm said.
IC Asset Managers Economist, Churchill Ogutu, however warned that the market conditions are yet to stabilise and that the drop in yields was not isolated to Kenya but across a number of African countries that IMF has been working with.
“This positive development could have given some positive sentiment for Kenya Eurobonds (KENINTs) in the week. But the fact that the positive performance was not isolated to Kenya, should offer some cautionary tale: investors were broadly risk-on on emerging markets or frontier markets names against the backdrop of increasingly recessionary fears,” said Churchill Ogutu. “Plus, the current setup is the perfect calm before the storm. This coming week, the US Federal Reserve is expected to hike the Fed fund rate by at least 75 basis points and that by itself should invite some risk-off sentiment on EM/FM names,” he added. This rally was not country-specific, but a number of African Eurobonds also had a decent run in the week. The benchmark 10-year (2032 maturities) across five African names such as Kenya, Egypt, Nigeria, Ghana, and South Africa returned an average of 6.3 per cent week-on-week. “We think the IMF progress gave Kenya some legs in the week,” IC Group Asset Managers said.
Funding arrangement
The IMF Executive Board, finally, approved the disbursement of around $236 million last week following the staff mission that completed its work three months back despite fears that elections could have put off the planned funding arrangement.
Kenya has been relying on reopening old bonds in order to avoid high cost of borrowing in the domestic market but the performance in the auction market had been dismal. Concerns about global inflation increased during the week ending July 21, as the Euro Area, United Kingdom and South Africa reported record high inflation rates of 8.6 per cent, 9.4 per cent, and 7.4 per cent in June, respectively.