Kenyans set to reap big from Eurobond

The interest charged on bank loans is set to go down after Kenya successfully raised Sh175 billion from the international market to pay for key infrastructure projects among them Lamu port, irrigation and generation of electricity.

President Uhuru Kenyatta Wednesday said the money raised through the Eurobond had already been deposited in the government’s account. It is expected to lead to a reduction in the cost of living by stabilising the shilling.

Although Kenya sought no more than Sh176 billion ($2 billion) from the international market, the government paper was oversubscribed by 500 per cent to Sh770 billion ($8.8 billion).

With the success of the Eurobond, the government would further reduce its domestic borrowing plans for 2014/2015, Mr Kenyatta said. This will leave greater room for the private sector to borrow for investment and give banks greater incentive to give favourable loan terms to consumers.

“With our plan to access international capital markets, we will reduce our recourse to domestic borrowing. Consequently, the government will review downwards domestic borrowing plans for the next financial year,” he told journalists at State House, Nairobi.

The influx of the dollars is expected to have an immediate impact on the shilling, which has been going through a period of volatility. A more stable shilling is good news for consumers because it will have a ripple effect on energy prices as well as the cost of manufactured goods.

Although the National Treasury has successfully pulled off the issuance of the Eurobond, the true test will lie on the implementation of projects using the funds.

Energy and agriculture projects

According to National Treasury Cabinet Secretary Henry Rotich, the government will route the funds to flagship infrastructure, energy and agriculture projects such as the Lamu Port, geothermal development and the Galana irrigation scheme.

If these are successfully implemented, they will lead to a reduction in the cost of electricity and an increase in food supply among other benefits that could ease the cost of living.

These projects have to be implemented on time if the money raised through the Eurobond is to achieve its intended purpose of spurring economic growth and creating jobs.

In his Budget speech early this month, Mr Rotich set a target of 80 per cent absorption of government funds for the coming financial year. The government has recorded low absorption rates for development funds at both the national and county levels. According to the Office of the Controller of Budget, absorption of development funds stood at 29 per cent in March 2014.

The government says that it is tackling procurement bureaucracy, which is often blamed for low absorption of funds. In addition to reducing tendering periods, ministries are also trying to synchronise and speed up procurement plans.

President Kenyatta also announced that he had set up a unit to monitor the progress made by government ministries, agencies and departments in implementing projects. The Delivery Unit will publish progress reports on a quarterly basis.

The Eurobond was issued in two tranches — one for Sh44 billion ($500 million) which attracted an interest rate of 5.9 per cent and will mature in five years and the other for Sh131 billion ($1.5 billion) which attracted an interest rate of 6.6 per cent and will mature in 10 years.

The interest rates were much lower than the projected eight per cent. Additionally, Kenya managed to outperform all other African issuers in the amount of money it attracted.

Most investors for both tranches came from the US and the UK. Fund managers took up most of the debt, accounting for more than 80 per cent of the buys on both tranches.

Mr Rotich attributed the positive performance to investor confidence occasioned by sound macro-economic management, governance reforms as well as diversification the private sector.

In subsequent forays into the international capital markets, he said, the government would seek to diversify the geographical origin of investors.

It is expected that the National Treasury will carry out a secondary listing of the bond in the Nairobi Securities Exchange (NSE) although timelines are yet to be provided.

Mr Rotich said Kenya could return to the international capital markets for more cash with products targeting the Diaspora, the Middle East and Asia.

In particular, it could target the Middle East through a Sukuk bond and the Asian market with a Samurai bond.

Sukuk is the Islamic equivalent of a bond that complies with Shariah law. On the other hand, a Samurai bond is yen-denominated and is issued in Japan, subject to Japanese regulations.