FOREX Africa: Kenya’s Sovereign Bond Hits The Road, South Africa downgraded

Written by Jeffrey Cavanaugh

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets are not one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

As Kenya goes on bond roadshow

Bond roadshows are the ultimate national beauty contests.  In the space of a few days officials from a country’s finance ministry must use every financial and economic trick in the book to convince skeptical judges from some of the world’s largest financial institutions that their nation is up to the task of repaying what they are seeking to borrow.

As in regular beauty contests, where liposuction, makeup, and other tricks-of-the-trade all hide blemishes a contestant might not want judges to see, Kenya too seems to be willing to engage in such practices to win over financial-market judges.

In this case Kenya has engaged in the same sort of statistical legerdemain that Nigeria performed earlier this year, when the West African giant recalculated its GDP and found that its economy was actually nearly double what it thought it was.

For Nigeria it was a triumph that put it head of South Africa in terms of continental economic might and a propaganda victory against naysayers who consistently point out the country’s continuing dependency on oil and its inability in keeping schoolgirls from being kidnapped by Islamist extremists.

Now, Kenya too has recalculated its GDP and found that its economy is now a fifth larger than what Nairobi thought it was. According to the Financial Times, which reported on roadshow documents its saw in mid-June, Kenya’s statistical revision puts the country’s 2009 GDP at $5.54 billion higher than previous estimates—a 20.65% increase.

This puts Kenya’s GDP in 2009 at about $37 billion, and growth since would now place Kenya’s economy at $50 billion in 2013. As the venerable financial paper noted, this for the first time put Kenya into the World Bank’s middle-income country category—rather convenient for a country seeking to raise $2.0 billion from foreign investors by the end of the year.

Nairobi’s issuance of bonds, however, raises something of a pickle for investors.  For one, the current attraction of Kenya is that unlike South Africa or Nigeria, it is not a commodity play premised on continuing, unsapped global demand for a particular natural resource such as oil, gold, or platinum.

Rather, Kenya’s growth is deemed organic by investors and based upon the growing size and sophistication of the country’s internal domestic market. Normally, this would mean the opportunity to gobble up debt issued by such an economy would be welcome, especially given that the government plans on using the monies raised by the bond to fund infrastructure investment.

However, if such investors choose to invest by buying Kenyan sovereign debt they may actually be facilitating a transformation of the Kenyan economy into exactly the type of economy they are seeking to avoid exposure to.That’s because Kenya looks set to become a major player in the emerging East African oil complex as both a producer and transport hub.

Indeed, in its recent budget statement Kenya’s finance minister, Henry Rotich, noted the government would be entering into a public-private partnership to develop an oil pipeline network linking up the region’s emerging production fields and the port of Lamu on Kenya’s southeastern coast. If completed, this would make Kenya very much a “commodity play” and ultimately tie its growth, like in Nigeria, to the price of oil.

S&P downgrades South Africa

Meanwhile, elsewhere in Africa on the sovereign debt front, the ratings agency Standard & Poor’s downgraded South Africa’s debt to BBB-, the second in two years by the agency, due to low economic growth and continuing labor unrest that has shuttered production in the country’s all-important mining sector.

This reinforces the emerging impression many in the financial community are developing on what is now Africa’s second-largest economy—that Pretoria and the ANC are likely incapable of fundamentally dealing with the country’s structural problems, which are many.

Indeed, with the increasingly corrupt, do-nothing ANC holding as firm a grip on power as ever, it seems that South Africa may be on a slow-growth trajectory for some time to come.

Then, of course, there is the huge question mark hanging over the collective heads of many in the developing world—China. While recent numbers out of Beijing suggest the Chinese growth miracle has yet to stop, it is nonetheless very much slowing down.

Last month China saw unexpected deceleration in industrial-output and investment growth and a decline in home sales—suggesting the housing and construction bubble in many of China’s great urban metropolises could be in the process of, if not bursting, then significantly deflating.  This will in theory necessarily negatively influence commodity prices as the slowdown induces Chinese builders and industries to buy less from abroad.

In theory is the necessary phrase to use here because while China is slowing it is nonetheless still growing at an impressive rate, which suggests the Asian giant is headed towards a long, soft landing that will only play itself out over the span of several years.

This is certainly a possible scenario to consider and is in fact the best one possible as it only somewhat dampens demand for African commodities and that only over the medium to long run. If it comes to pass this is certainly good news for Kenya’s sovereign debt issue as it means demand for Kenyan products, including future oil production, will still be there in the years ahead.


Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.