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January 21, 2019

New Eurobond debt good for Kenya

Distribution of eurobond money
Distribution of eurobond money

The government floated another $2 billion (Sh200 billion) Eurobond last week. As expected there was quite some noise, especially because the IMF seems unhappy with us for taking on debt outside their control. But in the middle of the noise several things have gone unnoticed.

First, the bond was seven times oversubscribed. In simple terms we had seven times more investors than we needed, willing to place their money in Kenya for 30 years! This tells us that these hard-nosed investors, who know a good investment when they see one, see Kenya as a good investment for the next 30 years.

However, what is even more important is that we have slain the ghost of election cycles affecting our economy. Those investing in this Eurobond have looked at the country and decided that their money is safe here, for six election cycles! We have now come of age. Elections will no longer affect economic growth.

The credit must go to President Uhuru Kenyatta. He did not do the usual ‘African’ thing of refusing to follow an election decision that he does not agree with, he accepted to have the polls nullified and then participated in the repeat presidential election. He basically told the world that in Kenya elections are an event; they will come and go, but Kenya will endure.

This message of ‘predictability’ is very important for investors and I hope that our government will communicate it far and wide. Basically we are telling the world that Kenya will outlast any election, and your money is safe with us.

The second thing that we are not discussing is the value of money and the cost of debt, how important this is for anyone or any nation that wants to grow economically. Under the ‘value of money’, we know that the only option Kenya has to the Eurobond is to save up the $2 billion we need. This could take us 30 years.

However the value of money today will not be the same 30 years from now. This means that to do what we need to do with $2 billion today could cost us maybe $8 billion in 30 years. So we are better off with the $2 billion debt now — as debt — than in 30 years.

Debt has a cost. But as Treasury explained, “We take loans from M-Shwari and there is a cost to it. Your car loan has a cost to it; your business loan has a cost to it; and your mortgage has a long-term cost to it.” The critical issue here is what the debt is for. “If you use your (debt) money for the investment it is meant for, it will pay.”

Treasury has assured us that this Eurobond debt, or any other debt that the government will take, will be used for investment. What we should discuss is whether the economic growth occasioned by the debt will outweigh the cost of that debt. After looking at what the government intends to do with the Eurobond, there is no doubt that the debt is worth it.

Finally we must demystify debt. Africans are scared of loans. This is what makes the Eurobond scary. However the fact is that debt allows us to finance growth projects we would not fund from our own resources. This is the same way we operate at individual level.

If, for example, your business has reached the point where you need additional manufacturing space to keep pace with demand, you approach a bank to finance this expansion. The bank loan facilitates your growth in a way that your company cannot afford on its own.

The Eurobond is therefore, first and foremost, a vote of confidence in our durability as a nation-state. Secondly, it is a lesson to all of us: to grow you must look outside yourself. Finally, do not be sacred of the cost of debt, just make sure the benefits of the debt outweigh its cost.

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