Kenya is now considering plunging into uncharted waters in search of much-needed funds to retire its $2 billion (Sh314.9 billion) Eurobond, pointing to heightened desperation as the clock ticks towards the June 24 redemption date.
Swapping the expensive commercial loan payments with nature conservation investments and issuing Chinese or Japanese bonds are just a few of the fresh alternatives that President William Ruto’s administration is open to, the National Treasury has said in its 2024 draft Budget Policy Statement (BPS).
The 10-year debut Eurobond that Kenya issued in 2014 will be maturing on June 24, at a time when the global financial markets have been tight due to higher interest rates in advanced economies. This has made it difficult for Kenya to borrow funds from the international capital markets to retire the bond, with Kenya enlisting the help of multilateral lenders like the International Monetary Fund (IMF) and the World Bank to mobilise funds.
Kenya also reneged on its self-imposed deadline of buying back part of the Eurobond by end of December last year.
“In light of increased cost of financing, the government will continue monitoring the global financial market conditions before accessing the international capital market for any liability management operations,” said Treasury in the draft BPS.
“The government will also explore other alternative sources of financing including climate change financing options, Debt for Nature (DFN) swaps, and Samurai and Panda bonds if market and macroeconomic environment allow,” added Treasury.
DFN swaps is perhaps one that Kenya is most keen on, with National Treasury having already published the Public Finance Management (Wildlife Conservation Trust Fund) Regulations, 2023.
The swap involves purchasing foreign debt, converting it into local currency and using the proceeds to fund conservation activities, or even development projects. The key to the transaction lies in the willingness of governments to sell debt at less than the full value of the original loan in the secondary debt market.
Following the publication of the regulations, monies from DFN transactions will be used for conservation of wildlife. The purpose of the fund shall be to develop wildlife conservation initiatives, manage and restore protected areas and conservancies, protect endangered species, habitats, and ecosystems, and support wildlife operations.
In Africa, overall, debt swaps have secured over $135 million (Sh21.2 billion) in conservation funding and other environmental projects, said the African Development Bank in a 2022 report.
Since 1989, around 12 countries have participated in DFN swaps with a purchase price of $34,167,895 (Sh5.37 billion).
However, according to Churchill Ogutu, an economist at IC Asset Managers (Mauritius), a DFN swap is a long-shot due to its lengthy process, which includes identifying the project to be funded and ensuring the project is “green enough to attract green financing”. “As it is right now, I don’t see that there is that pipeline that could warrant that,” he said.
The other options for raising alternative funds to the tight dollar-market of the Eurobond, Treasury noted, is issuing a bond in China. Such a bond, denominated in the Chinese renminbi (RMB), is known as a Panda bond.
Issuing of the Panda bond, as well as Japan’s Samurai bond, is one of the many ways the Asian economic giants are trying to muscle out the US dollar from the international bond market and the global reserve currency, according to Wahoro Ndoho, the CEO of SNDBX Capital.
“For Panda and Samurai bonds, I think it is something that is within reach ,” said Mr Ogutu.
Should Kenya issue a Panda bond it will be the second African country after Egypt which successfully issued a 3-year Sustainability Panda Bond worth RMB 3.5 billion (Sh77.66 billion) in October last year. Egypt is also issuing two Samurai bonds valued at 75 billion yen (Sh82.53 billion). bond.
Mr Ogutu noted that the Samurai bond has the advantage of having low interest rates currently, beside the fact that Kenya will be diversifying its debt currency mix, which is currently dominated by the US dollar.
“The only problem over there is the currency risk,” he explained. “If there is a way that they can do a direct conversion from Kenyan shilling to Japanese yen or Chinese renminbi (that will be good because) those currencies tend to be a bit stable.”
