Kenya turns to Mecca as one year Eurobond deadline starts ticking

Kenya wants to go the Egypt way in settling the Eurobond next year, indicating the government is exploring investors in the gulf countries who funded Cairo through a Sukuk bond.

Egypt raised $1.5 billion in a maiden Sukuk bond, a sharia complaint bond targeting a new base of investors in the Gulf countries and East Asia, as well as European countries and the United States.

Last week, the National Treasury told Parliament Public Debt and Privatization committee, the sovereign bond maturing in 2024 will be rolled over with a coupon of 11 percent based on the Republic of Egypt most recent issuance.

Amidst the geopolitical chaos in the world today, Kenya is pandering for a savior with barely a year to repay the Kes280.8 billion ($2 billion) Eurobond.

 “The commercial international sovereign bond maturing in 2024 will be rolled over with a coupon of 11 percent based on the coupon of the Republic of Egypt most recent issuance in March 2023,” said the Treasury.

Sukuk is the Islamic equivalent of bonds, and it is structured in such a way as to generate returns to investors without infringing on Islamic law which prohibits riba or interest.

Kenya is yet to issue a Sukuk bond in the capital markets despite the amendments through the Finance Act of 2017 that sought to include various definitions and Shariah-compliant products.

Treasury did not respond to our inquiry on whether it is considering the Islamic bond, but the cost being suggested looks like one. Kenya’s Eurobond that matures in June next year is currently trading at 12.6 percent way above Treasury’s refinancing target of 11 percent.

An Islamic bond would also interestingly coincide with the rise of Gulf countries influence in the country and the shift in the security and financial bureaucracy. Gulf countries have been testing assertive foreign relations in Africa as they prepare to play a more significant role in the world stage. The Arabs have also sought to secure their food baskets, leverage their strategic location in the world’s energy maps and justify their rule domestically by showing benevolence as good Muslims.

Africa which contains 60 percent of the world’s total uncultivated arable lands and is geographicly close to the Gulf is a great advantage. The Arabs feel the country’s water shortages are easily surmountable with appropriate investments.

Qatar which was hit severely with food supply shock during their diplomatic row with Saudi Arabia had shown interest in leasing land in Keya in 2008 President Mwai Kibaki government agreed to give them 40,000 acres In Tana delta.

While the plans went on freeze after local opposition, President Uhuru Kenyatta gave a cabinet nod that revived plans to lend out thousands of acres to the private sector.  President William Ruto wants to push through those approvals to accelerate the land deals targeting an initial 72,100 acres at Galana Kulalu, the Bura irrigation scheme, Egerton University, Kimabere Farm, Kirimum Field Unit, Masinga Farm, the Tana Delta irrigation project, and the Tana irrigation scheme for the leasing programe.

The Qatari have always had an interest in Kenya, investing in the country’s syndicated loans, and holding stake at Ecobank. The largest bank in Qatar, Qatari National Bank (QNB) at some point even published its results in Kenyan dailies. This year Qatari’s Arkan Investment Group has pledged to invest billions the planned state projects of Kileleshwa City, the Nairobi Pesa City Financial District, the affordable housing, and Downtown Nairobi at Railway City.

Their rivals Saudi Arabia have also kicked up relations through an ambiguous oil credit deal that has made the Kingdom both the country’s biggest import market and the second largest source of dollars through a surge in remittances. Recently, sixteen Saudi firms, including industry giants Aramco and Saudi Electricity Company, participated in Kenya’s maiden carbon auction netting Kes300 million. The firms were paying 23.50 Saudi riyals ($6.27) per metric tonne of carbon credits during the auction organised by the Regional Voluntary Carbon Market Company (RVCMC).

Kenya is at the centre of foreign relations haggling between the West, Russia and China as they seek to secure their own geostrategic interests. East Africa’s largest economy sits on strategic soil to the Great Lakes and Horn of Africa’s economic and security interests. The lengths of the Indian Ocean where the world’s oil navigates makes it important in security and as a route to extract minerals from Africa’s hinterlands. However, Kenya desperate to navigate next year’s Eurobond without damaging the creditworthiness with a default is disadvantaged in the foreign relations.

The government has not given a defined solution for the bullet Eurobond payment that would cost as much as all the value added tax the country collects in a year.

Treasury CS Njuguna Ndungu said Kenya has received more than 300 proposals offering various liability management solutions after the Government had advertised for an expression of interest for Lead Managers of Eurobond holding banks to devise an efficient path to resolve it.

The government had indicated it would go back to the Eurobond market, advertising locally for a transaction advisor for the proposed issuance, but it is unclear at what cost such a venture would prove.

Over the last one year, the US Federal Reserve Bank has raised rates from zero to 5.5 percent, that raised the cost of borrowing in the international market so high. Kenya had to cancel its Eurobond in June 2022 when the Fed Rate was just at one percent. While at that time investors asked for a cool 12 percent, a year later with a Moodys credit ratings downgrade, spiraling cost of local loans, a Kes4 trillion budget where rollovers are not guaranteed, it is anyone’s guess the cost of a new Eurobond.

There is no more easy money in the capital markets in the next couple of years, given the US Fed chair, Gerome Powell, told a House of Representatives committee that with inflation in the United States still excessive, most Federal Reserve officials expect to raise interest rates further this year.

The only option has been the multilateral lenders who have been more than willing to extend Kenya loans to rebalance the Chinese influence. But even with the backing of the IMF and World Bank who have underwritten Kenya’s creditworthiness with an extended programme and additional dollars to cover the Eurobond shortfalls, they would not directly pay off the commercial debt.

Kenya’s President William Ruto in his first days in office said he would rely on taxes and has hit the country with punitive levies on fuel, incomes and lifted cushions against inflation to raise the money. But with a legal challenge by Busia Senator Okiya Omtatah on enforcing the Finance Act and with domestic debt dangerously racking up in cost, maturities and unpredictability of auctions, Kenya needs money from somewhere to seem credible to investors.

President Ruto who wants the world to set up a new bank to help countries like Kenya manage debt and transition to clean energy claimed that Kenya had somehow come up with Kes140 billion which it would use before the end of the year to buy back half of the Eurobond. But without elaborating how, investors are not convinced Kenya has enough cash to settle the payment due to competing priorities and a drop in its foreign-exchange reserves.

Hence to make this Hajj to Mecca for such a miracle an option worth exploring.

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