Kenya is now in Eurobondage

When you are in the grip of Eurobondage and at high debt levels as Kenya is in, these are the things that happen. 

What you need to know:

  • Kenya’s debt situation is piling pressure on government finances in an unprecedented way.
  • The state has been struggling to raise money to meet ongoing debt repayment obligations and normal expenses, especially salaries and the constitutionally mandated transfer to the counties

Kenya is clearly stuck on the external debt treadmill and is firmly in the grip of what is now popularly described as ‘Eurobondage’. This is when, as an African country, you find yourself in a vicious circle in which you are permanently financing debt with debt, perennially negotiating extensions of redemption periods, and constantly dropping in credit ratings.

Nobel laureate Joseph Stiglitz could not have described the Eurobond borrowing craze and the phenomenon we are witnessing more aptly. He attributed the Eurobondage phenomenon to ‘‘short-sighted financial markets, working with short-sighted governments, laying the groundwork for the world’s next debt crisis’’. 

Last week, Kenya put out an advert inviting bids for transaction advisers to help it in two assignments. 

First, how to manage a massive US$2 billion Eurobond bullet payment that is maturing in June 2024. Secondly, advisory services on a new Eurobond issuance between July 1, 2023 to June 30, 2024. It is a gutsy move because the conditions in both the local and international debt marketplace are not so rosy. In recent auctions, domestic investors and bondholders have been voting with their wallets, sending a clear message that they are no longer willing to lend to the government beyond the 90-day T-bill tenors.

Last week, a reopened 15-year-bond had to be cancelled. Neither was the performance of a re-opened three-year bond encouraging: Out of Sh30 billion bonds on offer, bids were received for Sh7.3 billion, of which only Sh1.7 billion were accepted at a weighted average interest rate of 13.47 per cent.

In a previous bond auction, domestic and international investors were only willing to lend to the government for 30 to 90 days, and essentially refused to buy 10-year Treasury bonds as only Sh3.3 billion was taken from Sh20 billion on offer. These developments beg the following questions: Are the bond auctions collapsing just because investors are demanding high rates which the government is unwilling to accept? Or, is it the case that investors and markets may have already factored the spectre of a sovereign debt default? The jury is out.

What is clear, however, is that Kenya’s debt situation is now piling pressure on government finances in an unprecedented way. Already, the evidence is that the government has been struggling to raise money to meet ongoing debt repayments obligations and normal expenses, especially salaries and the constitutionally mandated transfer to country governments.

Indeed, the debt metrics are dire with public debt to GDP now at 70 per cent. But the gravity of the crisis is more accurately reflected in the statistics on what the government is currently spending on debt service: total debt service to revenues have galloped to a level of 65 per cent of revenues collected by the Kenya Revenue Authority.

When you are in the grip of Eurobondage and at high debt levels as Kenya is in, three things happen. First, what you spend on debt service is predominantly ‘interest on interest. Secondly, most of the debt is incurred to pay debt- borrowing from Peter to pay Paul. Thirdly, debt markets start demanding higher interest rates as investors start factoring a sovereign default.

Mark you, the proceeds of the Eurobond Kenya is planning will not be used to build roads, bridges or ports. The government made it clear in the advert that they want money to repay the Eurobond payment maturing within fifteen months. 

Kenya’s journey to the Eurobondage began in earnest in 2012 when the country went to the debt markets for a syndicated loan that was maturing in 2014. Come maturity in June 2014, Kenya faced clear blue skies, fresh leadership in the UhuRuto administration, and was touted as the one of the fastest growing economies in Africa.  Kenya was more or less the poster child of the Africa rising narrative.

In the circumstances, all it took was a road show in Chicago, London and New York to succeed. 
Yield-hungry fund managers in advanced debt markets in the West found the paper attractive because dollar interest rates were at a historic low. The fact that the market looked at the country favourably was demonstrated by the success of the tap sale in December that year where we raised $ 850 million.

Clearly, the Eurobond Kenya is planning currently will be floated in totally different circumstances. Instead of blue skies, what you see in international debt markets is thunderstorms and lightning.

The World economy is still recovering from a once in a century pandemic. The Europeans are in a war that adversely affected markets and supply chains of food, fuel and fertiliser. Indeed, Ukraine and Russia are among the biggest suppliers of tradeable wheat, maize and exportable fertiliser in the World.  Being net importers of both food and fuel, the hardest hit by the war in Europe has been countries in sub Saharan Africa.

Two other factors and happenings have combined to make the international debt markets precarious. First, rising interest rates in the North and the collapse of banks in Europe and the US, notably Credit Suisse. Rising interest rates are exerting pressures on exchange rates of African countries and increasing external debt repayments.

Here is how the ‘Eurobondage’ game is played? First, an African country is approached by three or four commercial banks with a proposal to arrange or underwrite a syndicated multimillion-dollar loan, typically with a two to three-year tenure.

When the syndicated loan comes due three years later, the African country will have no dollars to repay. But the stage will have been prepared for the same banks to come to you, offering to take you to international debt markets and support you in issuing a Eurobond so that you can get the money to repay the syndicated loan.

What you will observe is that any time the bonds or syndicated loans are nearing maturity, the country will not just borrow for refinancing of existing debt. They will issue bigger bonds to make it possible for them to collect big enough net proceeds to fund other expenditure.

European banks and fund managers are hopping from one African country to the another, where they collude with corrupt officials to saddle citizens with expensive dollar loans that are, in most cases, used to fund opaque security contracts padded with huge kickbacks and backhanders. The European banks are merely engaged in a selfish search for fat fees and commissions.