What do the Kenyan Budget numbers tell about the Sovereign Bond?

NAIROBI, KENYA: Three days have passed since the National Treasury Cabinet Secretary Henry Rotich appeared before Parliament to read out a budget policy statement in addition to presenting the Finance Bill. To the credit of Treasury, the statement was available on its website soon after the ceremony.

A content analysis of the digital version of the speech revealed that the Cabinet Secretary mentioned or made reference to the word ‘debt’ five times in the 23-page statement. His contention is that the national debt position is not only well-positioned but that there is scope for prudent expansion of debt to finance pressing development needs. Many informed Kenyans are often appalled by the paucity of financing options that the Treasury has traditionally taken. 

This year, the new idea that is being brought to the fore is that of a Sovereign Bond. This is a debt instrument issued by State to enable it receive money from private sources to serve a predetermined purpose. In the policy statement, Rotich cautiously made reference to the Eurobond and international financing instruments without spelling out what the overall value of that instrument will be. Later, the he stated that he would be leaving the country to meet with a number of private parties who would be interested in taking up the bond.

In paragraph 64 of the statement, the Treasury provides justification for the bond as a mechanism for diversifying funding sources. Curiously, he did not reiterate the strong view that successful delivery of this instrument would reduce the overall debt obligations by bending downwards the interest rates trend. The Cabinet secretary must be commended for failing to provide this contestable point before the legislature.

PRACTICAL INTENT

A number of Kenyan institutions and private sector collectives have made this claim without much challenge. Information about the quantum of the Eurobond suggest that it will be closer to the $ 2 billion (Sh174 billion), this is still less than 10 per cent of the total public debt in Kenya today. Noting that it will be issued to commercial institutions, there is no possibility that even the lowest credit rating would make a meaningful dent on the portfolio of debt.

The merits of a bond issued in foreign currency lies in other areas than the preposterous claim that it will drive down local interest rates. That the Cabinet secretary desisted from pressing this point is credit to his office to ensure that policy positions are not sold on smokes and mirrors approaches.

That idea about the effects on local interest having been dispensed with, the main merits of securing a bond designated in foreign currency becomes self-evident. The foreign exchange that would issue from the Eurobond would be equivalent to 30 per cent of all exports for 2013.

 Indeed, the stated practical intent is that the money will be used to extinguish a syndicated loan estimated at $600 million (Sh52.2 billion) provided to government by a group of commercial lenders. In essence, the transaction involves arbitrate because government attempting to use the loan with more attractive terms to extinguish the more expensive one.

A second advantage is that up to 60 per cent of the funds will be used to pay for infrastructure development. The argument that this is mostly an infrastructure construction bond finds adequate support here. Looking at the allocations to road construction together with anticipated public spending on energy, the availability of the funds to purchase equipment that may be required provides an assurance that the construction will continue.

For all the good things and the overstated benefits of the Eurobond, there are still outstanding risks. The main one is that the semblance of recovery in the United States especially, implies that there may be more competing investments due to the recovery. Fingers must remain crossed for the believers in the magic of the Sovereign bond as the cure for the high interest rates regime.

Our overall lesson is that the budget speech is that the Sovereign Bond will be issued but that objective views should be separated from the talking up of this Eurobond issue by the transactions advisors waiting for commissions from this deal.

—Kwame Owino is the CEO of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Kenya