Eurobond dossier reveals Kenya’s deep economic ties to China, IMF

Kenya’s economy is tied at the hip to China and swings in the Asian giant’s fortunes have a direct impact in Nairobi, a report released by the Treasury has revealed.

The report, in the form of a prospectus intended to appeal to international investors to buy Kenya’s latest Eurobond, also shows that Nairobi must swallow all the International Monetary Fund (IMF) prescriptions to stay afloat economically. 

The Treasury is seeking the new funding to support its annual budget and repay other maturing loans.

Nairobi says the huge debts Kenya owes to China tops the list of risks to its economy. 

“China is Kenya’s largest creditor and an adverse impact on the Chinese economy may impact the future ability of Kenya to increase its borrowings,” the document states, citing other risks to include volatile elections, the Covid-19 pandemic and the fact that Kenya is a net oil importer, which exposes its to adverse impacts of fluctuations in global prices. 

Though the document does not reveal how much the country plans to raise through the Eurobond, the Treasury indicated in past documents to IMF that it will raise about Sh253 billion ($2.3 billion) in commercial borrowing (Eurobond issuance) for project financing in the new financial year. This is the fourth Eurobond that Nairobi will be floating in seven years.

Kenya went for its first Eurobond in June 2014 where a total of Sh280 billion was borrowed in five and 10-year tranches. This inaugural Eurobond generated heated controversy after the government failed to show projects financed by the debt paper.

Kachumbari bond

The government went back for another Eurobond in 2018, where it netted Sh202 billion in 10 and 30-year tranches.

In 2019, Kenya was back at the international markets where it raised its Sh210 billion in its third Eurobond named the Kachumbari bond, that also repaid other loans and funded unspecified infrastructure projects.

The new prospectus prepared by the Treasury has also reveals that Kenya cannot pull out of the IMF structural reforms without facing painful economic consequences. 

One of the conditions for the loan is that lenders can recall the loan or mark it as a defaulted loan if Nairobi ceases to be a member of the IMF, or ceases to be eligible to use the general resources of the IMF. This would be a big blow to its future global fundraising efforts. 

“The IMF Programme will aim to reduce Kenya's fiscal deficit by broadening the existing tax base, strengthening revenue administration and cutting non-priority expenditures without compromising allocations to the social and growth-enhancing development programs,” the document says. 

It sets a target for Kenya to achieve a primary budget balance of Sh507.8 billion by June 30 2021, Sh202.9 billion by December 31 2021, and Sh369.4 billion by June 30 2022.

The document also notes that the IMF Programme will advance the broader reform and governance agenda, including by addressing weaknesses in some State Owned Enterprises and strengthening transparency and accountability through the anti-money laundering and anti-corruption framework. 

“The Government has also undertaken other measures to advance fiscal consolidation, and to improve management of the debt burden.

Sh3.6 trillion budget

As at 31 December 2020, outstanding bilateral external debt due to China (excluding Chinese commercial banks) amounted to Sh757 billion ($7.08 billion), making China Kenya’s largest creditor. 

During 2017, various ministries and corporations in Kenya, such as the Ministry of Energy and Kenya Power and Lighting entered into a series of loans with Exim Bank of China, amounting to a total sum of approximately Sh128 billion ($1.2 billion and CNY3.4 billion).

“Such loans mature between 2030 and 2040 and were used to fund certain infrastructure and electricity projects in Kenya. Further, as has been cited in media and ratings agency reports, the terms of Chinese lending may be less favourable to borrowers than debt from other multilateral or bilateral lenders,” it adds. 

To fund the new Sh3.6 trillion budget for the financial year starting July 1, the National Treasury plans to borrow Sh929 billion from local and foreign sources to plug the deficit. 

Treasury Secretary Ukur Yatani said he would borrow Sh271.2 billion from international markets and another Sh658.5 billion from the domestic markets. The Treasury also has an extra Sh609 billion debt redemption bill for the year, which will see it borrow to repay maturing debt. 

Kenya also plans to rebase its GDP in coming months. This promises to expand the economy and in return make Kenya’s debt to GDP ratios look better.

This will be the seventh time Kenya is revising the national account statistics. In September 2014, Kenya National Bureau of Statistics (KNBS) rebased its national accounts, changing the base year from 2001 to 2009, and revised the annual and quarterly national accounts statistics for the period 2006 to 2013.

The first revision was carried out in 1957 and subsequent revisions were carried out in 1967, 1976, 1985, 2005 and 2014. The next rebasing is expected to take place later in 2021.

New Eurobond offer

The UN Statistical Commission recommends that countries rebase every five years.

“Rebasing enables economic estimates to better understand the current structure of the economy and sectoral growth drivers, and to better reflect the performance of the most important parts of the economy,” The Treasury says in the prospectus.

The government has retained Citigroup and J.P Morgan, who were involved in the previous three issues, as the joint book runners of the new Eurobond offer. I&M Bank Limited and NCBA Group Plc are the new co-managers of the bond.

The Treasury in April said that it would use proceeds from a fresh Eurobond to retire expensive loans and refinance the old Eurobonds, if it fails to secure cheaper concessional loans.

The new Eurobond will be offered and sold in minimum denominations of $200,000 and integral multiples of $1,000. They will also be admitted for trading on the London Stock Exchange’s main market. 

The joint IMF-World Bank Debt Sustainability Analysis ("DSA") qualifies Kenya's debt distress risk as high, reflecting the impact of the Covid-19 pandemic, and in particular declines in exports and economic growth as well as fiscal measures taken in response, including increased expenditures and tax relief. 

To date, Kenya has either met in a timely manner all payment obligations to all external creditors or agreed terms for debt suspension under the DSSI, including with respect to its outstanding international bonds.

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