DEBT

African states risk Eurobond defaults on high rates - IMF

Yield on Kenya's inaugural 10-year Eurobond have almost tripled to 18.4 per cent

In Summary
  • Kenya is expected to settle the inaugural $2.75 billion bond taken in 2014 in July next year
  • The continent has 23 Eurobonds so far amounting to $16.9 billion. 

Africa countries whose Eurobond repayments of close to $6 billion are due next year, including Kenya will struggle to rollover repayments due to high interest rates. 

The International Monetary Fund (IMF) in its latest economic outlook for the region fears that yields on Eurobonds have more than doubled to hit past 12 per cent. 

"At current yields, no Eurobond has been issued since April 2022 and some countries may struggle to roll over near-term liabilities- indeed, aggregate upcoming Eurobond repayments of about $6 billion in both 2024 and 2025 are of particular concern,'' IMF says.

On Friday, yields on Kenya’s Eurobonds increased by an average of 63.3 basis points, with the 2024 maturity increasing by 58.5 basis points to hit nearly 19 per cent, having tripled.

The yields on the bond are hovering between 18.4 and 18.7 per cent this month, data published by the Central Bank of Kenya shows, reflecting the rising risk investors are placing on Kenya’s short-term debt.

The 10-year bond priced at 6.78 per cent was issued in 2014 to fund infrastructure projects under the then-Jubilee administration.

Kenya took up $2.75 billion in two tranches – a 10-year paper at a 6.78 percent interest rate and a five-year issuance at 5.87 per cent.

The five-year paper was repaid partly using the proceeds of another $2.1 billion Eurobond issued in May 2019.

Although it did not mention Kenya directly, the IMF cautioned that the current high rate regime won't go anytime soon and poses a fiscal challenge to countries expected to repay in the near future. 

The continent has 23 Eurobonds so far amounting to $16.9 billion. 

Kenya has tried several strategies to generate enough resources to pay off the loan amid heavy criticism and doubts from experts who fear a default.

Kenya’s Eurobonds plunged after Moody’s Investors Service said it might treat a planned buyback of some of the debt as a default.

According to Moody's vice president and senior credit officer, David Rogovic, redeeming the bonds at a price below par value would constitute an economic loss to investors said two months ago. 

In June, President William Ruto announced at the New Global Financing Pact in Paris that the government planned to buy back at least 50 per cent of its $2 billion Eurobond before the end of this year.

Investors were concerned that the government didn’t have enough money to settle the payment due to competing priorities and a drop in its foreign exchange reserves.

Even so, the country has insisted that it is ready to clear the debt on time; with the National Treasury chief Njuguna Ndung'u saying there is no cause for worry.

"Let us wait and see. It is true the global financial market is tightening but we have a plan,'' the exchequer boss told the Star. 

Responding to a research note by U.S. investment bank JPMorgan which said that the East African nation was "walking a tightrope" to avoid a crisis due to a maturing dollar bond and persistent currency weakness, Ndung'u said the situation is not unique to Kenya. 

"All low- and middle-income countries are walking a tightrope given the current economic constraints globally. The Kenyan case is being featured because of the Eurobond 2024, "Ndung'u said.

Kenya is now planning to use funds drawn from the IMF's programme and World Bank to repay due debt in the next year. 

IMF’s Deputy Director for Africa, Catherine Pattillo, told the Business Daily that the request for additional financing and the amount Kenya is seeking will be a key item during the upcoming review mission expected in December

Kenya has so far tapped $2.1 billion (Sh312.5 billion) from the on-going programme with the IMF including the second largest drawdown of $410 million (Sh61.0 billion) that was approved by the Fund’s executive board following the conclusion of the fifth review mid this year.

The fund extended Kenya’s programme by 10 months to lapse in April 2025.

 

 

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