Moody’s Investors Service has placed the B1 long-term issuer rating of the government of Kenya on review for downgrade.
The decision to place the rating on review for downgrade was prompted by the following key drivers:
- Persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness higher
- Government liquidity pressures risk rising in the face of increasingly large financing needs
- Uncertainties weigh over the future direction of economic and fiscal policy, in part due to evolving political dynamics
Moody’s expects that Kenya’s government debt burden, which has risen to 56.4% of GDP in June 2017, up from 40.5% five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60% mark by June 2018.
Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0% of its revenues on interest payments, up from 10.7% five years ago.
A key focus of the review will be to assess the capacity and willingness of the government to address these budgetary challenges in a comprehensive, effective and timely manner.
Moody’s would downgrade the rating if the review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.
Moody’s would confirm the rating at B1 if the review were to conclude that the policy response offers the prospect for tempering the currently-anticipated upward trend in government debt and that liquidity risks are being effectively managed.
Moody’s 4th annual East Africa investor summit Kenya, held in association with Rich Management, looked at East Africa’s resilience in Sub-Saharan Africa’s low growth environment.
- Kenya and Nigeria summit audience think political risks are main challenge to credit in emerging markets. Dubai summit ones are watching USA (policies under Trump and China (economic slowdown) events
- Between 2007-15, 6 of 10 fastest growing African economies were commodity exporters, but for 2016-18, 5 of fastest growing ones are in East Africa. While Sub-Saharan Africa growth is at a 20-year low, East Africa is attractive as their growth is not about commodities.
- Kenya’s economy growing due to infrastructure, FDI, population but banks not benefiting, partly due to the interest rate cap.
- Investors in Kenya want to see a benign August 8 election with a first round winner and a gracious loser.
Bank’s and interest rate:
- Banks face a dilemma – on whether to lend to companies in the Kenya economy or to the Kenya government (where they can earn 10% per year short-term, or 14% in the long-term).
- There was already a slowdown in bank lending (due to regulation and NPA’s) before the interest rate caps.
- The Cost of borrowing in Kenya was too high; and even after interest rate caps, large banks are still getting good 20% returns on equity.
- Some firms are opportunistically raising debt – locking in cheap funding ahead of the election e.g. East African Breweries announced they would build a brewery at Kisumu even as they are yet to agree on the financing. But the problems at Nakumatt are probably due to the drying up of their credit lines as banks feel 14% lending does not compensate their risk.
- At Moody’s, they rate three large Kenya banks – Coop Bank, Equity Bank and KCB Group all equally. Equity has 55% SME exposure and KCB is big in property, while Coop is well-balanced between business and consumer lending – but they have all taken steps to mitigate risks from the interest rate cap law.
Africa Debt markets
- While Moody’s recently upgraded Senegal and Ivory Coast and stabilized Ghana, 8 of 19 Sub-Saharan Africa economics are still rated negative.
- South Africa preempts state corporation defaults through bailouts – e.g. at Eskom, SAA – but this doesn’t inspire business confidence.
- East Africa economies have solid reserves (4-5 months of imports) but key risks are fiscal deficits and debt accumulation (50% debt to GDP is a warning point).
- One of the best performing Eurobonds in Mozambique defaulted.. a flood of money can ignore fundamentals
- Kenya has a history of debt going back over the last ten years.. it knows how to live with the debt. Currently 15 to 17% of Kenya’s income goes to pay debt – (Moody’s get data from government budgets or IMF)
- The London Stock Exchange, and some European ones, are considering issuing some debt in Kenya shillings.
- Kenya can do better in terms of exports & revenue e.g. by improving productivity – the government explained this to the IMF.
On Friday the Treasury Cabinet Secretary launched the second tranche of M-Akiba, the government bonds that can be bought and traded via mobile phone.
The first tranche of M-Akiba, worth Kshs 150 million was launched in March 2017, and marked at 10%, maturing in April 2020. They had their highest trading day on May 12 when about Kshs 345,000 was traded; usually, about Kshs 100,000 per day ($1,000) of M-Akiba are traded by investors so far. At the time of launch, the indication was that another Kshs 4.85 billion was to be raised in June 2017.
The new M-Akiba infrastructure bond issue (MAB2/2017/3) is targeting Kshs 1 billion (~$9.7 million), with a green shoe option to raise another Kshs 3.85 billion. These are also three-year infrastructure bonds (dated 24 July), paying 10% per annum, with interest paid every six months, and the minimum investment is, again, Kshs 3,000 (~$29). Payments for the new bonds will be done on mobile money such as M-pesa (by dialing *889#) as well as through Pesalink – a new service from Kenya banks that allows their customers to make payments via phone and mobile money transfers of up to Kshs 1 million (~$9,700) per day – which is seven times greater than what they can do with mobile money, under current banking rules (set to prevent money-laundering). The deadline for investors to apply for the M-Akiba bond is July 21, and the trading commission for will be 0.1% of allocations.
EDIT (July 23 Nation): MAB2/2017/3 has been extended to 8th September and the bond will start trading on 12th September. It has been reported that investors bought Kshs 128 million before the initial deadline, and the newspaper notice of the extension mentions that these invests will be paid for interest earned between July 24 and 11th September.
‘Akiba’ means ‘savings’ in Swahili.
$1 = Ksh 103
Update on NSE Bonds or bonds listed at the Nairobi Securities Exchanges and other bonds, since the last bond moment in May 2015 http://bankelele.co.ke/2015/05/bond-moment-may-2015.html.
Globally, the bond market is bigger than equities one, and according to the latest CMA Kenya quarterly statistics (PDF), bond market turnover in Kenya has been larger than the equities one since 2009 mainly due to government bonds. In 2016, equity market turnover was Kshs 147 billion (down from 209 billion) in 2015. Bond market turnover was Kshs 433 billion (~$4.2 billion) in 2016 (up from 305 billion in 2015). Turnover has been 99% due to government treasury bonds, while that of corporates is less than 1% of bond turnover in a year – except in the years 2010 and 2011.
If one doesn’t want to buy NSE bonds directly, there are CMA-approved bond funds for investors including the Apollo Bond Fund, Co-op Bond Fund, Diaspora Bond Fund, Dyer & Blair Bond Fund, ICEA Bond Fund, Madison Asset Bond Fund, and the Old Mutual Bond Fund. These fixed income /bond funds total Kshs 1.4 billion (or 2.5% of the 57 billion) of funds management by fund managers in Kenya.
- M-Akiba: Following the successful launch of M-Akiba, Kenya’s Kshs 150 million , 10%, tax-free, 3 year bonds that were entirely sold via mobile phone (the minimum investment was Kshs 3,000 (~$30)) another Kshs 4.85 billion (~$47 million) is to be floated in June 2017.
- Following the launch of a green bonds program, banks, under the ambit of the Kenya Bankers Association (KBA), have partnered with Nairobi Securities Exchange (NSE) towards raising the country’s first bank-supported climate change-aligned corporate debt instruments in the next six to eight months. The capital flows from the green bonds in Kenya will go towards funding bank clients that require finance for clean and sustainable development projects in the priority areas of energy, agriculture, transport, infrastructure, building and urban planning, and water and waste management…so far, banks operating in South Africa and Morocco are already tapping the green finance opportunities in partnership with local municipalities and development finance institutions. projects. Also in South Africa, the World Bank’s International Finance Corp (IFC) successfully raised a 9-year, 1 billion Rand Green Bond via the Johannesburg Stock Exchange. More on the Kenya Bankers Association Sustainable Finance Initiative.
- The Kenya Government finance bill 2017 will give Islamic finance bonds the same treatment as conventional bonds and also allow Islamic finance products in the cooperatives sub-sector.
- The Rwanda government is about to issue a 10 billion Rwanda franc (~$12 million), 7-year Treasury bond. It will be issued on May 24 and the funds will be used for infrastructure project and capital markets development. The bonds will be listed at the Rwanda stock exchange and trade in multiple of 100,000 francs (~$120).
- Nigeria has asked Goldman Sachs & Stanbic IBTC Bank to advise it on the sale of a debut “diaspora bond” targeted at Nigerians living abroad. – via @kenyanwalstreet
Corporate NSE Bonds:
- Centum announced a Kshs 2 billion one year 14.5% note for the Two Rivers Development.
- Cytonn is seeking advisors for their medium term notes to raise Kshs 5 billion from the public towards the financing of Cytonn real estate’s (CRE) projects including Taraji Heights in Ruaka and The Ridge in Ridgeways.
- On Monday EABL listed the Kshs 6 billion (~$58 million) of bonds at the Nairobi Securities Exchange (NSE) as the second and final tranche of its Kshs 11 billion shilling medium term note program that was launched in 2015. The tranche attracted bids worth Kshs 8.4 billion, representing a 41% over-subscription. The bonds maturing in March 2022 will pay an annual fixed interest of at least 14.17% and the raised funds will go towards optimising operations and restructuring the brewer’s balance sheet. “This is the first corporate bond to be listed on the bourse this year, and we are confident that its success, a subscription rate of 140.9% will open the doors for more listings in the course of this year.” said Nairobi Securities Exchange CEO Mr. Geoffrey Odundo. Citi upgraded EABL as a buy, due to its low price – seeing value even as the beer market was flat. The first half of FY17 (ended December 2016) showed decent volume growth for EABL (+5% YOY) but weak sales growth (-6%) as beer demand continued to shift from mainstream to value. EABL is doing well in spirits but struggling in beer, and Tanzania continues to present a challenge. – Citi report.
- A South African credit-only micro-finance institution Real People Investment Holdings which issued a multi-billion bond in Kenya late 2015, has received a negative rating. Global Credit Ratings (GCR) said it had downgraded the primary and special servicer quality ratings assigned, with the outlook accorded as negative.
- Transcentury bond holders lost 50% in a restructuring buyout deal.
- The African Development Bank had led the establishment of an African Domestic Bond Index and a $200 million African Domestic Bond Fund to deepen liquidity in local bond markets. It has also issued local currency bonds in 11 countries, including Kenya, South Africa, Egypt, Ghana, Nigeria, Botswana, and Uganda. leading the African Union in mobilizing domestic resources required to execute the Bank’s five developmental priorities dubbed the ‘High 5s’. – Light up and power Africa, Feed Africa, Industrialize Africa, Integrate Africa and Improve the quality of life for the people of Africa.
- The Africa Finance Corporation issued a US$500 million 7 year Eurobond. The senior, unsecured Eurobond which carries a coupon of 3.875% was priced to yield 4.000% and matures in April 2024. It attracted orders of US$2.4 billion, representing about 5 times over-subscription from 231 investors. The bond will be listed on the Irish Stock Exchange. The Eurobond was distributed to investors in Europe (29%), United States (25%), United Kingdom (24%), Asia (18%) and the Middle East (4%). Citi, J.P. Morgan, MUFG and Standard Chartered Bank acted as Joint Lead Managers and Bookrunners for the U.S. dollar-denominated issue.
- FSD Africa (Financial Sector Deepening Africa) and KfW Development Bank will invest £15.3 million (~$19.8 million or Kshs 2 billion) in the African Local Currency Bond Fund enabling it to step up its engagement with developmentally important industry sectors such as green energy and housing and take on investments in fragile and conflict-affected states. ALCBF is managed by Lion’s Head Global Partners (LHGP) Asset Management LLP.
- Bonds, Loans & Sukuk Africa “the continent’s only Pan-African debt event” takes place on 13th & 14th March 2018, at the Cape Town International Convention Centre.
A few days ago saw the launch of green bonds in Kenya with the signing of a memorandum of understanding between the Kenya Bankers Association, Nairobi Securities Exchange (NSE) and Financial Sector Deepening Africa (
not FSD Kenya). Through this, they hope to deliver lower cost funds through capital markets to finance green projects. China is actually the leader in this along with India, but Kenya, as part of a climate bonds initiative, will be the flagship for green bonds in Africa.
NSE CEO Geoffery Odundo NSE Odundo said green bond listings at the NSE would attract impact investors while Kenya Bankers Chairman, Lamin Manjang said they hoped the first green bond would list at the NSE this year. FSD Africa has committed $600,000 to this and the IFC will partner with KBA to determine green portfolio i.e. projects that quality for such finance, from sectors such as energy, agriculture, infrastructure, transport, manufacturing. Other actives to be undertaken include and enabling small banks to take part in financing the pipeline, extending green bonds across East Africa, creating a pool of Kenya green finance experts, and promoting green Islamic finance.
More on renewable energy project finance in Kenya.