Aberdeen Sees Opportunity for Kenya to Tap Eurobond Market

  • Yields on existing debt near record lows amid global stimulus
  • Country will borrow $4.5 billion to finance capital projects

With yields on its existing dollar debt near a record low and global investors clamoring for returns, Kenya should seize the opportunity to wade into the Eurobond market for the second time in two years, according to Aberdeen Asset Management Plc.

East Africa’s biggest economy will borrow 462 billion shillings ($4.5 billion) from external lenders this fiscal year to help a plug a widening budget deficit, according to budget documents. The country raised $2.82 billion in a debut sale of five-year and 10-year Eurobonds in 2014 and may sell new debt “if an opportunity presents itself,” Treasury Secretary Henry Rotich said in June.

“If they were looking to issue, this is as good a time as any,” said Kevin Daly, a portfolio manager at Aberdeen in London, whose Emerging Markets Debt Fund has outperformed nine out of 10 peers this year, according to data compiled by Bloomberg. Aberdeen added to its holdings of Kenyan dollar bonds in the second quarter, the data show.

Yields on Kenya’s securities due June 2024 have dropped 105 basis points this quarter, reaching a low of 7.11 percent on Tuesday. The yield rose three basis points to 7.14 percent by 3:58 p.m. in Nairobi. The bonds have gained as global investors pile into high-yielding assets to offset low returns in developed markets.

Kenyan debt “has performed well,” Daly said, with a return of 15 percent this year, according to Bloomberg indexes. A premium of 50 to 75 basis points above existing debt “would probably get people off their seats,” and waiting too long would increase the risk of an emerging-market sell-off pushing yields higher, he said.

Kenya would issue a Eurobond if it could get “a good deal in terms of yield and tenure and amounts,” Rotich said in a June 27 interview. The country already secured a $600 million loan from China and a $1.5 billion stand-by facility from the International Monetary Fund this year.

Political Risks

General elections set for August 2017, in which President Uhuru Kenyatta is seeking re-election, may raise the cost of issuance if it were delayed until next year, Jibran Qureishi, an economist at Stanbic Holdings Plc., said in a telephone interview from Nairobi.

“It makes sense for them to do it before November or December,” Qureishi said. “In 2017, political risk premiums would be too high.”

Kenyatta’s government is borrowing to finance projects including a $3.2 billion railway that’s the biggest investment in the $61 billion economy since independence in 1963. The budget gap is forecast to widen to 9.3 percent of gross domestic product in 2016-17, from 8.7 percent in the previous year. The economy, benefiting from low prices of crude, may grow by 6.1 percent in 2016, according to government forecasts.

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