Kenya’s shilling strengthened, reflecting investor confidence in the government’s ability to repay the maturing Eurobond in June. The move to international markets aligns with the broader goal of stabilizing interest rates and fostering economic growth.
A Eurobond, not exclusive to Europe, allows governments and corporations to raise substantial capital in foreign currencies. Typically denominated in US Dollars, Eurobonds attract large investors like banks and governments, providing them annual interest and principal amounts at maturity.
Governments opt for Eurobonds to enhance creditworthiness, attract foreign capital, and mitigate domestic borrowing competition that elevates interest rates. This strategy supports financing major projects like infrastructure, reducing reliance on local markets and diversifying lending opportunities for commercial banks.
Debates on bond issuance
Kenya’s decision to issue a new Eurobond at a higher rate (10.3%) to retire the existing debt (6.8%) has triggered debates. Critics, including economist Thuo Ndung’u, question the necessity of this move, citing recent multilateral loans received by the government.
“Borrowing at 10.3 per cent to settle a debt that we took at 6.8 per cent is a huge gamble. It was unnecessary and is expected to pile pressure on the country’s already high public debt,” says Ndung’u.
Government’s response to investor concerns
The government’s announcement to buy back over $1.4 billion of the maturing bond through a tender offer aims to allay investor concerns about repayment capabilities. The buyback is funded by the newly issued Eurobond, adding a layer of complexity to the ongoing fiscal narrative.
Consumer tax risk and broader challenges
Despite the short-term relief provided by the Eurobond, challenges such as high debt levels, inflation, and declining purchasing power persist. The bond issuance, with orders exceeding $5 billion, highlights global investor interest but raises concerns about the associated consumer tax risks.
