Eurobond: Kenya borrowing into a Greece-type crisis

Following the issue of the $2 billion (Sh202 billion) Eurobond, Kenya’s debt levels have hit a new depth. Since 2013, we have seen an increase in the appetite for debt.

What is a Eurobond? Wanjiku might ask. According to http://www.investinganswers.com, a Eurobond is a bond floated in a foreign market and denominated in a currency not native to the issuer's home country. Eurobonds are denominated in currencies other than the home currency of the issuer usually in US Dollars. Eurobonds are bearer bonds.

In 2014, Kenya issued her first Eurobond of $2.75b. The issue was meant to free pressure on domestic borrowing and lower the interest rates. Unfortunately, nothing much can be said about that. The intended effects of the borrowing have not been felt.

Fast-forward to 2018, the government, in what the president has termed as an overbidding, has raised a $2 billion Eurobond debt at the London Stock Exchange.

The bindings were made to the tune of $14billion, seven times the intended issue. This could mean two things. One; that the investors have enough confidence in Kenya honoring her obligations, or two; the returns attached to the issue are attractive and huge. I will doubt the first reason and believe the second reason.

The 10-year Eurobond issued in 2014 had a yield of 6.875 percent. The recent Eurobond has been issued into two parts of Sh101b ($1b) with maturities of 10 years and 30 years whose coupon rates are 7.65 percent (up from 2014- 6.875 percent) and 8.625 percent respectively. This could serve as enough reason as to why the investors did an overbidding for this counter. The total interest paid by the end of the 30 years totals to Sh323b, which is enough to build nine fully-equipped referral hospitals.

Analysts have raised questions about the importance and the need for this issue. The 2014 issue has never been fully accounted for. The pertinent questions have never been answered. The explanations we have received is that the issue was politicised.

In the Transparency International list, Kenya is still stuck in the bottom 20 countries that are deep in corruption. IMF has advised the Kenyan government to check on its appetite for debt financing. The situation is unsustainable. The mounting loans might send Kenya into a future where she cannot service her debts.

In the year ended June 2017, Sh435.7b went to service debts while in current fiscal year Sh658.23b will service our debts.

 After the recently issued Eurobond, for every one hundred shillings, Sh54 will go to debt financing. This is not only alarming but also worrying.

This is much so because a bigger part of the borrowed funds will be used to finance an earlier debt that is almost maturing. It’s simply borrowing from Peter to pay Paul, which is a very expensive affair.

With the current debt standing at Sh4.8trn against a population of 40 million, each Kenya owes the debtors sh120,000. It’s an economic crisis in the making. Mozambique and Greece should serve as enough references before we go leverage.