Yatani’s change of heart drags Kenya back to ‘Eurobondage’

National Treasury CS Ukur Yatani during a briefing with Council of Governors on the county revenue allocation formula. [Wilberforce Okwiri,Standard]

When he took over from Henry Rotich as the Cabinet Secretary for National Treasury, Ukur Yatani was likened to the biblical Moses in that he was seen as the man to deliver Kenya out of what some analysts have described as “Eurobondage.”

Ambassador Yatani’s immediate task was to clean the Exchequer, bringing to an end the unbridled borrowing where loans were being hawked within the corridors of Treasury Building.

He would also task the Kenya Revenue Authority (KRA) to collect every penny owed to the State and implore ministries to cut wasteful spending.

In so doing, Kenya would be freed from the bondage of expensive loans.  

“I want to assure you that we are not only serious, but we have no other option because we have to live within our means,” said Yatani in October 2019 as the acting Cabinet Secretary for National Treasury at the time.

He acknowledged that the road to replacing the expensive loans would be a long one, but he was confident the country would get there.

But this narrative has changed. Instead of brashly marching Kenyans through the cloud of uncertainty occasioned by Covid-19, Yatani has hinted that he might turn back to the Eurobond market.

Just like the Israelites who had plentiful in Egypt but lived under bondage, Kenya finds itself back in the wilderness of international capital markets where loans are easily available but repayments are painfully costly.

The promised land where government coffers are teeming with adequate taxes and cheap loans looks too distant for Treasury, which is also tasked with reviving an economy that has been battered with Covid-19.

Even some members of the National Assembly, such as Minority Leader John Mbadi, who is also a member of the Budget and Appropriations Committee (BAC), have been taken aback by Yatani’s change of heart.

The last time Yatani met members of BAC, said Mbadi, the CS assured them the government was not likely to borrow commercial loans. “That (issuing a Eurobond) is not in the plan,” said Mbadi.

Churchill Ogutu, head of research at Genghis Capital, an investment bank, termed Yatani’s move a “complete 360-degree turnaround.”

“But that said, the authorities don’t want to let the opportunity slip by with the record influx of stimulus in global economies and interest rates in the developed world at rock-bottom levels,” explained Ogutu.

Following the outbreak of Covid-19, governments in advanced economies have been pushing a lot of money into their firms and households in a bid to prop them up.

Experts reckon some of these excess funds might find their way into the international financial market to be lent to developing countries.

The Eurobond market, with its expensive loans, has contributed to the country’s growing debt crisis.

These loans are characterised by high interest rates, in some instances over 10 per cent, shorter repayment periods and almost no grace period.

Consequently, with the country having tapped over Sh600 billion worth of Eurobond loans since 2014, debt service costs have spiralled.

For every Sh100 that the government paid out from its coffers to settle debt, Sh76 went to commercial creditors.

This compares to only Sh2 it spent to service commercial loans seven years ago, according to the Annual Public Debt Management Report tabled recently in Parliament.

Payment of Eurobond interest has meant that other critical public services, such as healthcare, are sacrificed as debt payment is a first charge on government’s revenue that cannot be delayed.

For example, Treasury last year fell behind in the disbursement of funds to the 47 counties by two months as the national coffers dried up but was quick to make arrangement to honour its debt obligations.

Hooked on Eurobonds

Rich countries gave Kenya some breathing space by allowing the country to suspend debt repayment by six months to July, but the Eurobond and other loans issued by private sector players stood.

In a way, Kenya has been hooked on the Eurobond loans in what some pundits have described as “Eurobondage.” 

Chief Economist and Head of Research, Africa and the Middle East at Standard Chartered Bank Razia Khan in an interview with The Standard in 2018 could not have put it any better.

“Once a country issues a Eurobond, it makes sense to come back to the market to refinance,” explained Ms Khan. 

Refinancing - repaying one maturing loan with another one - is exactly what the National Treasury plans to do with another Eurobond that it might tap in the current financial year ending June 2022.

In the Budget Policy Statement (BPS) 2021, Treasury has indicated that it expects disbursement of sovereign bonds worth Sh124.3 billion.

In a briefing to editors last week, the Director-General for Public Debt Management Office at the National Treasury Haron Sirima noted that the country would access the “international capital market to refinance some of the large debt maturities” in what is aimed at minimising debt service costs.

In addition to refinancing, the loan might also be used for budgetary support.

Dr Sirima insisted that the government would only dive into the Eurobond market should Kenya fail to get cheap finances from multilateral institutions such as the World Bank, International Monetary Fund (IMF) and the African Development Bank (Afdb).

Since the outbreak of Covid-19, the country has received over Sh600 billion from these multilateral institutions. That tap might have run dry for Kenya, and indeed several other countries.

There have already been a number of Eurobond issues by Latin American countries such as Brazil and Peru, as well as several African countries, including Ivory Coast, Egypt and Morocco.

Unfortunately, by opting for the Eurobond, Kenya has driven itself into a debt trap it cannot easily extricate itself.

Unlike in the 1990s when most of the African countries that found themselves in a debt crisis negotiated with the IMF and the World Bank for debt forgiveness on condition that they implement structural adjustment programmes, this is not possible presently, with a big chunk of the debt stock being held by private creditors, including bondholders.

While the IMF and the World Bank were interested in the stability of the international financial system, private creditors such as pension funds in the United States and Europe that bought Kenya’s Eurobond, want the highest returns for their investors.

Kenya might, however, find a friendlier Eurobond market, according to Genghis Capital’s Ogutu.

“There’s a huge appetite for higher yields that a frontier market like Kenya will offer to the international market,” he said. However, he is worried that the recent rating downgrade by S&P and further possible downgrades by other credit rating agencies pose a negative risk.

Treasury knew of this possibility. This is why, in addition to not agreeing to participate in the restructuring of private loans such as the Eurobond, it has also quickly moved to strike an arrangement with the IMF.

Ogutu reckons that the country might issue its fourth Eurobond in the second quarter of the year after hammering a deal with IMF, which is likely to be in place at the start of April.

“Most investors seek assurance from an IMF programme, hence I think that issue will bolster a Eurobond issue,” he said.

The clearest indication that Kenya would be going back to the international capital market came when it dithered in participating in the Debt Service Suspension Initiative (DSSI) under the auspices of the G-20, a group of 20 rich countries.

At first, CS Yatani said the country would not participate in the initiative, noting that the terms were “too restrictive.”  

But it looks like investors are not necessarily punishing any of the countries that benefited from the initiative.

“In the case of Ivory Coast, its issue was a one billion euro issue, and it came after it had benefited from the DSSI,” said Ogutu.

Cote d’Ivoire’s bond was priced at a record-low yield of five per cent and was still five times oversubscribed.

A report by rating agency Fitch and JP Morgan Emerging Market Bond Index indicated that other African countries, including Ghana, will follow Cote d’Ivoire in issuing Eurobonds this year as market conditions have eased sharply.

“We expect three sovereigns (South Africa, Namibia, and Nigeria) to conduct further issuance (bonds) to meet funding needs and believe Cote d’Ivoire, Ghana and Kenya will return to the markets in 2021,” read part of the report.

So far, Kenya has borrowed about Sh610 billion from Eurobonds or sovereign bonds denominated in dollars.

External debt repayment in the next financial year is estimated at Sh613.4 billion, with the Treasury expected to refinance more than half of this, partly from the Eurobond. 

Since the State cannot repay all these loans from its tax coffers, it expects to refinance principal payments of close to Sh351 billion.