Kenya bond investors are reaping region-beating gains this year as prospects for growth stoked by oil discoveries help counter concern the country remains vulnerable to terror attacks.
Shilling sovereign debt of East Africa’s biggest economy, which plans to sell its debut Eurobond this year, returned 6.2 percent in dollar terms in 2014, the most after Turkey among 16 emerging markets in Africa, Europe and the Middle East, according to Bloomberg indexes. The yield on the local-currency 10-year security, sold in January, has been at a record low since April 3.
The economy is forecast to grow 5.5 percent this year, versus 5 percent in 2013, driven partly by exports of tea and flowers and spending on ports and railways amid speculation that crude production may begin by early 2016. While terror attacks including September’s siege of the Westgate Mall in Nairobi roiled sentiment, demand for 10-year shilling bonds at a sale in January exceeded supply by four times.
“This indicates robust appetite for Kenya’s securities,” Gaimin Nonyane, a London-based senior macroeconomic specialist at Ecobank Group, said in an e-mailed response to questions on April 3. There’s a “favorable prospect in the country’s mining and oil sectors, which are attracting significant capital inflows,” he said.
Kenya, which first considered selling a Eurobond in 1997, may offer at least $1.5 billion, Treasury Secretary Henry Rotich said in September. JPMorgan Chase & Co. and Barclays Plc are arranging the sale, which the government is still completing documents for, Rotich said on April 2. The country plans to use the debt as an “exit strategy from borrowing in the local market,” Deputy President William Ruto said April 7. Rotich was in the U.S. and didn’t have any new details on the sale, he said by phone yesterday.
President Uhuru Kenyatta, the 52-year-old son of Kenya’s first leader, Jomo Kenyatta, pledged to boost annual growth to as much as 10 percent in his first term and create one million jobs a year. He was elected March 4, 2013.
Kenya is building Africa’s biggest wind-power plant in the country’s north and a $5.2 billion standard-gauge railway from the port at Mombasa to Nairobi. Tullow Oil Plc doubled its estimate for oil resources to more than 600 million barrels in January. Brent futures rose almost 2 percent over the past 12 months.
The shilling weakened less than 0.1 percent to 86.55 per dollar by 6:27 p.m. in Nairobi, bringing its loss this year to 0.3 percent. Ghana’s cedi, which has the same B1 rating as Kenya at Fitch Ratings, is Africa’s worst-performing currency in 2014, down 13 percent as the West African nation struggles to contain its budget and current-account deficits. Futures contracts show the shilling is set to slide to 92.54 per dollar over the next 12 months, according to data compiled by Bloomberg.
The currency is set to weaken amid “an expected rise in the level of imports due to heightened demand for capital goods to support the construction of large-scale infrastructural projects,” Vinita Kotedia, a research analyst at Nairobi-based Genghis Capital Ltd., said in an e-mail yesterday.
Spending on roads and railways is set to bolster growth and the country is seeking to almost double tourist arrivals in the next three years, Kenyatta said April 7.
Visits to the country, known for bush safaris and beaches, fell 7 percent last year after seeing an increase in gun and bomb attacks since deploying soldiers in neighboring Somalia in 2011 to battle the al-Qaeda-affiliated al-Shabaab militia. The Australian government warned its citizens against visiting Nairobi and Mombasa because of reports that terrorists are planning attacks in the cities, it said March 29.
“Travel advisories from developed nations may slow down the inflow of tourists, bearing in mind the current sensitive security situation,” Kotedia said.
The government is also trying to convince local banks to ease credit terms to spur growth that missed estimates in 2013. The average lending rate was 17.06 percent last month, according to the Central Bank of Kenya, which held its benchmark rate at 8.5 percent for a fifth time March 4.
The auction yield on six-month Treasury bills fell 55 basis points this year to 9.83 percent yesterday, the lowest since September. The rate has fallen at the past five sales, according to data compiled by Bloomberg. Yields on 15 billion shillings ($173 million) of notes due January 2024, sold at a coupon of 12.18 percent earlier this year, were unchanged at 11.52 percent on April 8. Kenya is selling 15 billion shillings of five-year bonds through April 22, the central bank said April 3.
The lower borrowing costs, outlook for growth and a window offered by the U.S. Federal Reserve’s stimulus tapering means Kenya should make its move on the Eurobond sale, according to Razia Khan, head of Africa economic research at Standard Chartered Plc in London. Dollar financing will become more expensive when asset purchases are ended, she said.
“For Kenya it makes sense to move early,” Khan said by phone on April 8. “Kenya also has a decade-old infrastructure deficit to try to correct. The sooner it can get going with that, the better for its growth.”