On May 16, 2019, Kenyan Treasury officials stood on the balcony of the London Stock Exchange to ring the opening bell to celebrate the listing of the country’s third Eurobond issue worth $2.1 billion (Sh247 billion), which was four-and-a-half times oversubscribed.
The State had secured the bond at rates of seven and eight percent respectively for seven-year and 12-year tranches, which was just about par for African sovereign issuances at the time.
Fast forward three years later, the same investors are demanding 17 percent if the government wishes to float a seven-year paper and 15 percent for a 12-year tenured Eurobond.
At the end of April, secondary market yields rose after reports of a dollar rationing among banks spooked investors, with sources saying this forced the Treasury to suspend plans to issue the Eurobond for the second time this year after a similar opt-out at the beginning of the year.
Instead, officials said they would consider a syndicated loan as an alternative, but even that has had no traction yet — they are still waiting for a response from potential lenders.
Treasury CS Ukur Yatani told the Business Daily two weeks ago that they had engaged banks on the syndicated loan plan but offered no timelines because the lenders had yet to give feedback.
Global shifts in capital to western markets where rates have been raised to fight high inflation have largely contributed to higher yields on African sovereign debt but there are also concerns about debt sustainability that raise risk perception.
“Emerging markets and developing economies with existing sovereign debt sustainability concerns as well as elevated debt levels should continue to face the wrath of tightening financial conditions. Already, yields on international bonds, for example, in Africa, have nearly doubled this year, reflecting the rise in external borrowing costs,” analysts at NCBA said in the lender’s economic report for July 2022.
The Treasury has to find Sh845 billion from both domestic and external lenders to close its budget funding gap in the 2022/23 fiscal year. In the previous year, the deficit stood at Sh1 trillion.
Domestic lenders are now also demanding higher interest rates from the government, aware of the narrowing options from the external market.
Two weeks ago, the Treasury raised just Sh6.4 billion out of a target of Sh20 billion from a tap sale of the 18-year infrastructure bond it first floated in June, despite the paper carrying a tax-free coupon of 13.74 percent.
In comparison, a 19-year infrastructure paper sold in February this year seeking Sh75 billion attracted bids worth Sh132 billion, offering a coupon of 12.96 percent.
While the sale was partly undersubscribed due to low liquidity in the market, analysts have also seen investors increasingly putting up aggressive bids on short and long-term securities.
“The CBK will come under pressure to accept more aggressive bids for long-term debt to encourage subscription or risk an under subscription in subsequent auctions,” said Sterling Capital in a note on the bond tap sale.
Treasury bill rates across all three tenors have gone up by an average of 96 basis points since the beginning of the year, while the bonds yield curve on the medium to long term is approaching 14 percent, up from about 13 percent a year ago.