Kenya is planning to sell a seven-year Eurobond at a yield of around 11%, which is higher than any other issue on the continent so far this year, according to a person familiar with the matter. The proceeds will be used to finance the repurchase of as much as $2 billion in debt coming due in June.
The East African nation’s dollar bonds gained on the news, as investors welcomed the move to reduce the refinancing risk of the $2 billion Eurobond that matures on June 24. The yield on the bond maturing in June dropped to 9.96%, the lowest since January 2020, while the yield on the bond maturing in February 2031 fell to 10.28%, the lowest since November 2020.
However, some analysts and economists have raised concerns about the high cost of the new bond and the sustainability of Kenya’s debt, which has risen sharply in recent years. Kenya’s public debt stood at 69.6% of GDP at the end of 2023, up from 50.2% in 2015, according to the World Bank. The International Monetary Fund (IMF) projects that Kenya’s debt will peak at 73.5% of GDP in 2024, before declining gradually to 61.7% by 2030.
Kenya has been facing external debt pressures since 2020, as the COVID-19 pandemic hit its economy and reduced its foreign exchange earnings from tourism, remittances, and exports. The country also faced higher borrowing costs in the international market, as the US Federal Reserve tightened its monetary policy and the Russia-Ukraine conflict increased geopolitical risks. Kenya had to cancel a planned $1 billion Eurobond in mid-2020, as the yields on its existing bonds soared to over 20%.
To ease its debt burden, Kenya secured a $2.34 billion loan from the IMF in April 2021, under a 38-month program that aims to strengthen its fiscal and debt management. The IMF has disbursed $1.17 billion so far, subject to quarterly reviews and policy reforms. Kenya also received debt relief from some of its bilateral creditors under the G20’s Debt Service Suspension Initiative (DSSI), which deferred about $600 million of payments due in 2020 and 2021.
Despite these measures, Kenya still faces significant debt challenges, especially in the near term. The country has to repay about $4.5 billion of external debt in 2024, including the $2 billion Eurobond and about $1.5 billion of loans from China for the construction of a standard-gauge railway (SGR). The SGR project has been controversial, as it has been plagued by cost overruns, operational losses, and environmental concerns.
Some experts have suggested that Kenya should seek debt restructuring or relief from its commercial and non-Paris Club creditors, such as China, to reduce its debt service costs and free up fiscal space for development spending. However, the Kenyan government has ruled out this option, saying that it would hurt its credit rating and reputation in the market. Instead, the government has opted for liability management operations, such as the Eurobond buyback, to smooth out its debt maturity profile and lower its refinancing risk.
While the Eurobond buyback may help Kenya avoid a default in June, it does not address the underlying issue of debt sustainability, according to some analysts. They argue that Kenya needs to implement more fiscal consolidation, enhance its domestic revenue mobilization, improve its debt transparency and governance, and diversify its sources of financing to reduce its reliance on external borrowing.
Source: Bloomberg
