Kenya's negative credit profile to push up new Eurobond cost

International commercial banks are likely to cost Kenya's fifth Eurobond  higher if they factor in the country's latest negative credit rating 

Early this month, the National Treasury Cabinet Secretary Ukur Yatani confirmed that the country was planning to float a $1 billion (Sh116 billion) sovereign bond before July for budgetary support. 

Moody's Investor Service, an international credit rating firm is the latest to issue a caution on the country's borrowing power, maintaining B2 with a negative outlook. 

Updating the rating issued in May last year, Moody's cited the country's slow fiscal consolidation which is likely to tighten revenue amid relatively high debt obligation in the financial year starting July. 

It has also blamed the negative outlook on increasing risk exposure both in the local and international market, citing the forthcoming general election and ongoing supply glitch in the international market that has pushed up the cost of basic commodities including food and fuel. 

Moody's has also attributed the revised outlook on currency devaluation that has seen the shilling shed 6.2 per cent on the US dollar since June last year. 

The shilling yesterday traded 116.31 against the greenback which accounts for over half of Kenya's external debt. 

The country's debt increases by Sh40 billion any time the shilling drops a unit against the US dollar.

Most of Kenya's external debt which accounts for 51 per cent of the country's total public debt is denominated in US dollars, with the latest data from the National Treasury showing that it accounts for 71 per cent of external debt.

Other currencies including Euro, the Japanese Yen, the Chinese Yuan, and the Sterling Pound hold debt to 18.0 per cent, 6.6 percent, 5.4 per cent and 2.5 per cent, respectively.

''Kenya's creditworthiness has shrunk but its sovereign bond is likely to draw many investors due to competitive interests. International investors are currently favouring stable markets,'' Moody's said. 

Latest weekly data from the Central Bank of Kenya (CBK) shows yields on Kenyan Eurobonds have been on the rise so far this year with the 2019 7-year issue recording a 3.6 jump in yields while the debut 2014 10-year issue posted a 3.2 per cent rise in interest rates.

Last year, Kenya raised $1 billion (108 billion) debt in its fourth Eurobond offer that was oversubscribed fivefold. The 12-year loan attracted an interest of 6.3 per cent. 

In May 2019, Kenya raised $2.1 billion from international capital markets to pay off other loans including a $750 million Eurobond that matured on June 24, 2019, and other debt obligations.

The bond was issued in two tranches of seven-year tenor and 12-year tenor priced at seven per cent and eight per cent respectively.

In 2014, Kenya issued a $2 billion Eurobond and tapped for a further $750 million, while the second Eurobond of $2 billion was issued in February 2018.

In March, yet another international credit rating agency, Fitch, lowered its outlook on Kenya’s sovereign debt to ‘negative’ from ‘stable’, citing a projected slowdown in Kenya’s GDP growth this year due to the August 9 election jitters and continued fiscal pressures.

The agency said a bruising presidential poll poses the biggest threat to Kenya’s economic recovery since the Covid-19 shocks last year.

“The negative outlook reflects uncertainty about planned fiscal consolidation and risks to economic growth around the August 2022 general election,” said Fitch in a statement.

“Furthermore, the surge in global commodity prices puts upward pressure on inflation and the current account deficit.”

Fitch affirmed Kenya’s rating at B+ which signifies higher relative risk, with a more-than-average chance of default.

It, however,  increased the country's growth prospects for the upcoming financial year citing faster growth in the service sector as the country recovered from Covid-19 and expected recovery in agriculture which slowed this year due to erratic rainfall.