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What “Kenya” Do? What Kenya Did!
Kenya’s upcoming $2 billion Eurobond payment due in June 2024 had been a cause of concern for many investors as the maturity quickly approached. However, in mid-February, a pivot in the country’s approach to raise funds quickly alleviated investors’ anxieties: Kenya successfully issued $1.5 billion through an international bond sale that was well oversubscribed, and used the cash to buy back 96% of its 2024 obligation at par. In our eyes, the government’s decision to issue was a smart move and a crucial step towards alleviating short-term risks for the country. It greatly reduces the event risk surrounding the impending Eurobond maturity and creates room for policymakers to turn their attention to a policy agenda that puts the country on a better and more sustainable path moving forward.
In our June 2023 blog post, What "Kenya" Do?, we outlined the government’s robust three-pronged approach to pay down its debt: reduce the fiscal deficit, boost growth via the private sector, and capitalize on several multilateral financing sources, such as the IMF and World Bank. But as 2024 began, some investors remained concerned about the country’s ability or willingness to refinance itself on the commercial market. Elevated US treasury yields coupled with wide credit spreads led many investors to believe the East African country was “priced” out of capital markets. While Kenya’s new bond ended up yielding just north of 10% at issuance, we don’t think that arbitrary marker implies the country is at risk of a downward spiral.
Rather, Kenya’s credit quality has been steadily improving and we believe the trend can continue to strengthen. Policymakers should use this win to advance their agenda to place the country on better structural footing for sustainable growth going forward. Key points to address include moving ahead with privatizations, continuing to reduce the fiscal deficit, and making improvements to the business environment to attract Foreign Direct Investment and improve the nation’s export capacity, which has just about halved over the past 12 years. We have since seen early evidence that they will do just that, with the Cabinet meeting to add six new assets to the privatization list in the days immediately following the new bond issuance.
In our June blog, we noted a missing piece to the puzzle was a much-needed currency adjustment. Since then, a change in leadership at the central bank has sparked some reforms to the currency market. After years of tight constraints on the Kenyan shilling’s exchange rate to the US dollar, 2023 brought depreciation of approximately 28%. Continued moves towards a free float would be welcomed as another sign of the country’s reducing vulnerabilities, but the adjustment has already attracted new interest in the local bond market.
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