The decision by NASA not to recognise Uhuru Kenyatta as President poses a risk to your investment in the Eurobond.
This is the word of caution that four banks that helped Kenya sell its Sh200 billion Eurobond gave to mostly American and European investors that sunk money in the 10 and 30-year dollar bond.
In a prospectus prepared by CitiGroup, Standard Bank, J.P. Morgan and Standard Chartered Bank, the bondholders were informed of the country’s “volatile political environment” which saw NASA’s Raila Odinga refuse to recognise Kenyatta’s election preferring to go through a mock oath as the People’s President.
The transactional advisors noted that continued levels of political uncertainty in the country might affect capital markets, tourism and foreign investment, as well as Kenya’s economy as a whole, a situation that would jeopardise Kenya’s prospect to pay back its debts.
With a slow-down in the economy, where there are more dollars leaving the country than entering, would leave the country with subdued reserve of foreign currencies critical for repayment of external debts such as the Eurobond.
“Although some stability was achieved following the Supreme Court ruling in November 2017, political uncertainty remains as a result of NASA’s refusal to recognise Kenyatta as President,” read part of the prospectus prepared on February 28, six days after the National Treasury Cabinet Secretary Henry Rotich announced that Kenya’s Eurobond had been subscribed seven times.
“There is no assurance that instability will not increase again in the future, which may impact Kenya’s level of tourism and foreign investment or risk of sudden withdrawal of foreign deposits among other things, which in turn may adversely affect Kenya’s economy and its ability to service its debt, including the Notes,” added the prospectus.
Kenya, acting through the Treasury, issued a 10 and 30-year Eurobond Notes at a yield of 7.250 per cent and 8.250 per cent respectively.
Proceeds of the Eurobond are expected to go towards some development while the rest will be used to offset some maturing syndicated loans.
“A successful roadshow was conducted with International investors. It covered a wide geography and has resulted in a significant level of interest,” said the Treasury CS. “The fact that we got $14 billion in investor appetite reflected the continued support the country receives and makes it one of the highest order books for an issue from Africa.”
The first Eurobond, issued in 2014, has been a political fodder with the Opposition led by former Prime Minister Odinga insisting the money never reached the country.
The Government, through the Treasury, says proceeds from the Sh275 billion did hit the Government’s account known as Consolidated Fund- though it has been at pains to pin-point some of the projects made using the Eurobond cash.
There were fears that risk factors, including high political and security tensions which attracted negative media coverage would dampen the country’s second Eurobond.
Growing fiscal deficit
Indeed, heightened political activities for the better part of last year saw the economy take a beating as investors adopted a wait-and-see approach.
“Uncertainty associated with elections coupled with the effects of adverse weather conditions slowed down the performance of the economy in 2017. As a result, the economy is estimated to grow by 4.8 percent in 2017, which is a slowdown from the estimated growth of 5.1 percent in the 2017 Budget Review and Outlook Paper (BROP),” said Treasury in Post-Election Economic and Fiscal Report prepared last month.
Other risks that Eurobond investors were warned against included the country’s growing fiscal deficit- or the difference between the money that the country spent and the money it collected in taxes.
According to the transactional advisors, because the country’s fiscal deficit kept growing, it would be forced to borrow more. With the debt growing faster than the economy, the country risked defaulting on its debts repayment.
“If the government is unable to achieve budgetary targets and limit Kenya’s fiscal deficit, Kenya’s economic growth may be adversely affected,” said the transaction advisors.
Kenya’s failure to tackle corruption and money laundering were also cited as other risks.
“Although the number of cases handled by the Kenya Ethics and Anti -
Corruption Commission (the “EACC”) declined following the enactment of the Ethics and Anti-corruption Commission Act, 2011 and the Anti-Corruption and Economic Crimes (Amnesty and Restitution) Regulations, 2011, the number of cases has risen in recent years and corruption continues to be a concern.”
The report acknowledged Kenya had put in place a number of measures to combat corruption and money laundering by establishing the proper legal and regulatory framework.
