Kenya has returned to international credit markets in the run-up to its maturing 2024 eurobond, increasing financing sources.
However, its credit profile remains tied to its ability to deliver on planned fiscal consolidation that supports improvements in debt affordability.
Terms of upcoming bond issuance are comparable to those of syndicated loans but with a slightly longer maturity.
“Given still sizeable external financing needs over the next several years, market access along with multilateral funding will be critical to the government’s continued ability to service its external debt,” says Moody’s in its Credit Outlook report.
Moody’s says Kenya will need $3 billion in annual external financing to meet its external debt service needs after 2024.
Where Kenya Will Source Credit From
Kenya’s needs include nearly $2 billion per year owed to private creditors and Chinese bilateral creditors, two groups for which refinancing can come at a higher cost of borrowing and lack predictability.
Apart from the new eurobond issuance, Kenya has had substantial foreign currency inflows in recent months from multilateral creditors, and also from bilateral and commercial creditors.
IMF approved sixth review of Kenya’s Extended Fund Facility and the Extended Credit Facility disbursing $624.5 million in January.
It also approved augmentation of Kenya’s existing programs by a total of $941.2 million.
Future Funding From World Bank
World Bank is expected to provide Kenya between $1 billion and 1.5 billion under its Development Policy Operation before 2024 eurobond maturity.
“Other external financing sources are less certain, but the government has raised funding from the syndicated loan market and could receive additional loans from bilateral creditors, which would boost Kenya’s international reserve position from around $7 billion currently, or about four months of import coverage.”
The Waek Shilling Effect
The combination of the shilling’s 21% depreciation against the US dollar in 2023 and a rise in domestic borrowing costs has seen Kenya’s credit metrics plummet despite a narrowing fiscal deficit.
Kenya’s domestic borrowing costs rose sharply throughout 2023 and into 2024, with Treasury bill yields increasing to more than 16% in January 2024, compared with below 10% in December 2022.
Yields on longer-dated Treasury bonds have also increased, despite shortening the average maturity of newly issued debt.
“This higher cost of domestic borrowing has significantly weakened our expectation for Kenya’s interest-to-revenue ratio compared to our forecast at the time we confirmed Kenya’s B3 rating in July 2023.”
Fresh Bond Sale
Kenya signed a memorandum of understanding (MoU) on February 9, 2024, with Nippon Export and Investment Insurance (NEXI) to issue a Samurai Bond worth $500 million in two phases of $250 million each.
A Samurai Bond is a Japanese yen-denominated bond issued in Tokyo by a non-Japanese entity and subject to Japanese regulations.