According to BMI Research, there is an increasing likelihood of Kenya issuing another eurobond prior to the August election, as higher inflation will push up yields on domestic debt.
A sharp increase in February inflation has seen yields on 91 day T-bills fall into negative territory and the central bank has cancelled recent auctions of short-term domestic debt rather than accept higher yields now demanded by investors.
However, yields on the government’s outstanding USD 2024 eurobond have been steadily falling since January 2016, leaving them close to their lowest level in 18 months.
“Finally, a stable outlook for the local currency will offer the government another reason to borrow from abroad. We believe substantial foreign investment into several large-scale infrastructure projects will guard against any significant depreciation of the shilling. Although we forecast inflation dynamics will see the unit fall by an average of 3.7% per annum between 2017 and 2021, we do not believe this would pose a serious threat to the government’s debt servicing capacity over the longer-term given our expectations for robust real GDP growth” noted BMI Research.
Related; Kenya Treasury to present 2017/18 budget on March 23
With revenue growth struggling to keep pace over the first half of the fiscal year, BMI analysts believe the government will resort to further borrowing to fuel spending over the final months of the campaign season.
Despite the Eurobond Market looking increasingly attractive for the Kenyan government, there remain some downsides.
“The sovereign’s growing debt burden has been much-commented on in the Kenyan media over recent months, and issuing a high-profile eurobond could attract criticism from fiscal hawks in the country’s parliament. While yields on the existing USD 2024 bond are currently relatively low, investors would likely price in a higher risk premium as a new eurobond issuance added to an already substantial government debt burden, projected to reach 60.1% of GDP in 2017.” BMI Research said.
