Kenya’s Eurobond rates surge as Russia-Ukraine feud rises

Wednesday, May 4th, 2022 00:18 | By
Treasury Cabinet Secretary Ukur Yattani. Photo/People Daily/Library

Payments of interest from Kenya’s Eurobond loans soared by the highest margin ever last week since the onset of the Russia-Ukraine war threatening to choke the country’s access to the foreign debt market.

“In the international market, yields on Kenya’s Eurobonds rose by an average of 68.5 basis points. The yield on the 10-year Eurobond for Angola also rose, while that for Ghana declined,” the Central Bank of Kenya (CBK) said in its latest weekly bulletin.

Eurobonds are fixed-income debt instruments that are denominated in a different currency than the local one of the country where the bond’s been issued. The primary reason for issuing Eurobonds is a need for foreign currency capital.

Reports indicate that Kenya’s Eurobond yields have been rising sharply since February when Russia invaded Ukraine to overtake yields on Angola’s Eurobond debt and is now almost at par with Ghana’s.

New funding

This could chase away investors from the market to the detriment of kenya’s economy.

Further, with Kenya’s economy relying heavily on China the global supply chain challenges may affect the Asian giant’s fortunes which may also have a direct impact on Kenya’s debt situation at a time Treasury attempts to seek new funding to repay maturing loans.

The Covid-19 pandemic and fact that Kenya is a net oil importer, which exposes its economy to adverse impacts of fluctuations in global prices

The war in Ukraine which escalated last week saw Russia halt gas supply to Poland and Bulgaria. Further, US equities fell amid a sharp rise in equity volatility due to poor earnings as Russia pounded Ukraine.

This has sent global commodity markets soaring with food and energy prices skyrocketing causing further spiking inflation both abroad and at home.

Last week, Kenya hinted it may suspend a planned $1 billion (Sh115.26 billion) Eurobond debt issue, on account of the rising yields and uncertainty on the international market. Fears abound that rising yields globally will make the borrowing expensive

This has seen the exchange rate deteriorate making it hard for the Kenyan government to service its debt obligation as foreign exchange becomes even harder to get with banks being accused of hoarding forex.

Apart from avoidance of currency or forex risk, Eurobonds were supposed to expose Kenya to a huge range of bond maturity periods and also broaden the potential investor base.

Global oil prices dipped during the week ending April 28 after the US administration reported a modest crude oil inventory build-up while Murban oil prices decreased to $104.68 per barrel on April 21 compared to $108 per barrel on April 14.

As of April 28, the usable foreign exchange reserves remained adequate at $8.4 billion, or 5.01 months of import cover, which is fine by the regional standards.

Loans cushioned Kenyan economy

“This meets the CBK’s statutory requirement to endeavour to maintain at least 4 months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,” the CBK said.

Last week, the International Monetary Fund said it had reached an agreement to provide Sh28 billion to the central bank to help Kenya deal with external shocks and inflationary pressures while USA noted the loans cushioned Kenyan economy.

Kenya’s external debt is estimated at over Sh4.1 trillion as of December while domestic debt was at Sh4 trillion last December, experts say lack of up to date market information is also a key factor affecting borrowing costs.

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