Kenya is expected to issue its maiden Eurobond of $1 billion before year end, joining other African nations raising cash from the global market as investor confidence in the continent grows.
Analysts expect Kenya to pay more for the debt than Nigeria and Rwanda who issued their bonds earlier this year — before the federal bank in the U.S. made indications that it intends to cut back on its economic stimulus plan, which pumped cheap money into its economy.
The withdrawal of cheap money is expected to force international rates to go up as it is the source of liquidity in global markets, which allows investors looking for high returns to take a risk in African economies.
“Given the current macroeconomic dynamics in the U.S. and in Kenya it [yield at issue] is likely to be higher than those of Rwanda and Nigeria,” Vimal Parmar, head of research at Burbidge Capital, told AFKInsider in a phone interview.
Ghana’s ten year deal of $750 million, which concluded in July when rates had started rising in the U.S. was penned at 8.75 percent. Ghana’s price is higher than that of Rwanda and Nigeria despite the country being an oil producer and having a better credit rating and governance record than the two nations.
Nigeria with a credit rating of BB- attracted a yield of 6.625 percent on its $1 billion ten year bond issued in June while Rwanda’s bond of a similar tenure and amount attracted a return of 6.875 percent.
Before Federal Reserve Chairman Ben Bernanke’s comments indicated a possible rise in interest rates, analysts had priced the Kenyan bond between six and 6.5 percent — Ghana at around five percent. Kenya has a credit rating of B+ and is considered to have a stable outlook with projected economic growth exceeding six per cent.
“To avoid uncertainties associated with the direction of the American rate, the government has to settle on a fixed rate,” Parmar said.
Apart from the American money market, Kenya should also hasten the deal to avoid competing for cash with Ghana whose government has approved the issue of a second bond of $1 billion.
Other African states that have issued international bonds include Senegal, Namibia and Zambia. The ability of the developing nations to raise debt in the international market is an indicator of the growing global confidence in African nations which had in the past been considered volatile to lend to.
All sovereign bonds issued by African nations in the recent past have been oversubscribed and this is expected to be the case in the Kenyan deal.
“The government is dragging its feet too long given that the price of money globally is likely to go up and there are other African nations intending to make issues. Had it issued its bond at the same time as Rwanda — even $2 billion would not have been ambitious. I think $1 billion is a given,” said Aly-Khan Satchu, managing director of financial advisory firm Rich Management.
In June, Kenya issued bids for transaction advisors with a two-week deadline for those who wanted to express their interest underlining awareness of the need of speed. The amount is marked to be used for infrastructure development.
Tanzania and Uganda are also contemplating issuing sovereign debts. The former is currently seeking a credit rating which is crucial when approaching the international market.
African governments have turned to Eurobonds owing to their longevity, cheaper rate compared to local borrowing and lack of pre-conditions like those given by multilateral financiers, such as the International Monetary Fund.
As at end of June this year Kenya paid $1.4 billion as interest for its $22 billion total debt which is 51.7 percent of the GDP. IMF holds that Kenya’s debt position is healthy despite it being higher than that of its peers, some of whom are beneficiaries of debt relief such as Rwanda, Tanzania, Uganda, Ghana and Zambia.
Ghana’s debt however shot up last year due to public wages. The resultant high debt ratio is said to have contributed to the premium rate the country paid for its sovereign debt. Its public debt increased to 49.4 percent of GDP in 2012, from 40.8 percent in 2011, higher than peers such as Nigeria which has a debt-to-GDP ratio of 18.6 percent. Nigeria used a bulk of its oil revenues to settle its debts in 2010.
The bulk of the Kenyan government debt is domestic at $20.5 billion, with $9.6 billion being external.
The direction of Kenya’s inflation rate is also a concern as the spread between the local and international credit has to be rational. Kenya’s inflation rate has been edging upwards and the short term rates have also started rising, indicating a higher rate for the sovereign debt.
Inflation ratio stood at 6.02 percent as at end of July compared to 4.7 percent in June.