Why foreign investors see gems under Kenya’s red headlines

Kenya’s Eurobond issue has been received well on the international market in a surprising show of confidence given the prevailing news headlines, but just how did we pull this one off?

Nation Economics Editor Jaindi Kisero helps us understand why foreign investors think Kenya is worth more than it seems to be at the moment.  

“Despite all that is going on in the country including the recent terror attacks, the demand for the Eurobond has been high, an indication that the market has confidence in us and believes that things are working,” said Mr Kisero.

A bond is a loan where the borrower promises to repay the lender the borrowed money plus a stated interest rate at a specified future date.

A Eurobond is an international bond issued in a currency other than that of the borrowing country. It is also called external bond.

“We do not have a fiscal crisis and our financial markets are deep, perhaps deeper than what we have seen in other African countries, this in itself has attracted the investors leading to a high demand,” Mr Kisero continued.

EYEING THE POSITIVE

The situation is also depicted in Nigeria, where despite terror attacks, the country’s capital markets have almost shrugged off the noise on the security front. This, however, does not mean that insecurity does not affect a country's attractiveness to investors.

Experts had betted on 8.5 per cent as the average interest rate, with no information coming in on the proposed rates though the government sought 5.9 for the first note and 6.9 for the second note.

Mr Kisero places the likely interest rates at an average of 7 per cent as the investors are eyeing Kenya as the pivot of the East African region.

“Investors continue to look for yield but are also able to look through the headlines to focus on the positive underlying credit stories of potential African issuers," John Wright, an emerging-markets banker at Barclays, told the Wall Street Journal on Wednesday.

Reuters added, “Fund managers say Kenya has a positive growth and monetary policy outlook, making it an attractive investment proposition, despite the attacks that are hitting tourism.”

On the effects of a successful Eurobond to the borrowing and exchange rates in the country, there is likely to be stability in the exchange rates and lower interests in local borrowing.

EXTERNAL DEBT

“The country will be receiving more dollars in form of debt, this will basically stabilise the exchange rates in the country, at least in the short term,” said Mr Kisero.

He added that on the basis of how the borrowing rates in the country work, the effect will be on both short-term and long-term borrowing with short-term rates likely to decline.

Kenya has been taking up a lot of external debt lately, with the recent loan to fund the standard gauge railway project, the external debt impacts the country’s debt sustainability.

Mr Kisero stated that the offers the Eurobond is getting internationally will require the government to reconsider the country’s debt sustainability.

“At the moment we have not exceeded the debt sustainability, taking up a higher offer like the $8.8 billion (Sh774 billion) offer will mean the country’s debt sustainability will be affected,” he added.

BUDGET DEFICIT

He further stated that the country may just opt to accept the targeted offer of up to $2 billion (about Sh175 billion) so as not to harm its debt sustainability.

The Eurobond is critical to financing the Sh400 billion budget deficit and will be a litmus test since this will be the first time the country will be marketing a Eurobond, as the 1989 borrowing was in the form of a private placement.

“Many people refer to the 1989 borrowing as a Eurobond, but it was not. It was a small bond of 26 million dollars that were to finance some defence contracts which was only traded in New York, this time it is a public issue and traded in the international stock exchange attracting more investors,” said Mr Kisero.

A team from the National Treasury, led by CSC, started the Eurobond road shows two weeks ago in the US before heading to London and other markets.