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Cabinet Secretary for National Treasury and Economic Planning Prof Njuguna Ndung'u. FILE PHOTO | DENNIS ONSONGO | NMG

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Kenya plans Chinese, Japanese bonds to fund Sh326bn deficit

Kenya plans to raise an undisclosed amount of money through new bond sales in China, Japan and the Middle East, as it moves to diversify its external sources of debt and fund a Sh326 billion budget deficit in the new financial year starting July.

Treasury Cabinet Secretary Njuguna Ndung’u told the nation the country is ready to look east after a successful Eurobond sale and tap into the Chinese market with a Panda bond, the Japanese market with a Samurai bond and the Middle East with sharia compliant Sukuk bond to reduce reliance on the western capital markets.

“Yes indeed. We need to diversify to other markets – Chinese market with Panda bond, Japanese market with Samurai bond and the Middle East with Wakala Sukuk bonds. All these diversified bond markets will support financing projects and programmes under the Bottom-Up Economic Transformation Agenda,” Prof Ndung’u said in a text message.

Prof Ndung’u was responding to a question of whether Kenya had plans to issue the bonds in the new financial year.

The revelation comes weeks after Kenya completed a $1.44 billion (Sh190 billion) Eurobond buyback that saw it partly retire the $2 billion (Sh264 billion) Eurobond in advance in February before the official maturity date of June.

The Central Bank of Kenya (CBK) Governor Kamau Thugge said the plan to issue the new bonds will be considered alongside other financing options to fund the new budget.

“Kenya has not applied to the Chinese financial market regulators to issue Panda bonds. The plan to issue Panda bonds will be considered alongside other market financing options to finance the budget deficit for the financial year 2024/5,” Dr Thugge said in a text message.

The two officials did not say how much the country would be looking to raise from the three bonds, but it is expected to be more than Sh100 billion.

The debt office boss said in an earlier interview with the nation that Kenya now prefers issuing open market bonds that are more transparent and come with no strings attached compared to the bilateral loans that look cheap on paper but have other conditions, some of which may not be in the best interest of the country due to changing geopolitics.

The budget estimates for the next financial year show that Kenya will borrow up to Sh703 billion to plug the hole in the Sh4.1 trillion budget. Under the funding plan, the country will borrow Sh377 billion from the domestic market and the remaining Sh326 billion will come from foreign debt.

Bloomberg reported last week that Kenya planned to raise $500 million (Sh66 billion) through a debut bond sale in China to widen its funding pool from foreign sources, adding that the sale is planned to take place in the fiscal year starting July 1 and will be used to finance its budget deficit.

China’s Panda bond market has been attracting new issuers due to lower funding costs and a policy push. The World Bank was Kenya’s single biggest lender, with a debt of Sh1.8 trillion by the end of January 2024. This was followed by Eurobond investors (Sh1.1 trillion) and China came in third with Sh920 billion. These numbers vary in line with the currency fluctuations.

“Kenya’s also planning to issue a $500 million so-called Samurai bond in Japan and debt-for-nature, debt-for-medicine and food-security swaps,” Bloomberg said. Treasury officials who spoke to the nation did not dispute the report.

Kenya has also been considering turning to the Asian Infrastructure Investment Bank to provide guarantees to support the issuance of the renminbi-denominated bond after President William Ruto’s Cabinet approved membership of the multilateral lender.

Kenya has a 3.9 percent budget deficit target of its gross domestic product for the year through June 2025 and 3.3 percent for both 2025-26 and 2026-27. The Treasury says in the 2024 Budget Policy Statement (BPS) that in light of the increased cost of financing, the government will continue to monitor the global financial market conditions before accessing the international capital market for any liability management operations.

“The Government will also explore other alternative sources of financing, including climate Fund financing options, Debt for Nature Swaps, Samurai and Panda bonds, depending on the prevailing market and macroeconomic conditions,” the Treasury says.

The BPS is a government policy document that sets out the broad strategic priorities and policy goals to guide the national and county governments in preparing their budgets for the subsequent financial year and over the medium term.

But to access the international market and get cheaper credit, Kenya has in recent months put up a major campaign to demonstrate its ability to repay debt on time to calm the nerves of international investors.

“(To graduate from the negative credit ratings) and attract cheaper debt from global markets, there is a need for actualizing the long-planned fiscal consolidation; improvement of export sector performance and expand foreign reserves accumulation; promotion of economic growth to boost GDP per capita; and improve on food production, access and affordability in order to lower and stabilize the Consumer Price Index (CPI) and Real Effective Exchange Rate (REER), among others,” the Treasury notes in its January economic bulletin.