Kenya to Cut Local Borrowing by Half as Samurai Bond Mooted

Kenya will reduce domestic borrowing by almost 50 percent as the government considers broadening its foreign-debt portfolio with bonds denominated in yen and Shariah-compliant securities, President Uhuru Kenyatta said.

The state may cut the amount of debt it sells to local lenders by about 90 billion shillings ($1.02 billion), Kenyatta said in an interview in the capital, Nairobi, on Aug. 2. The government is increasing offshore borrowing after investors demanded five times the $2 billion it raised in debut Eurobond sales in June.

“Our objective is to reduce our initial intended borrowing, which is about 190 billion shillings, and see if we can reduce our exposure in the domestic market to about 100 billion,” Kenyatta said. “Those are the kind of levels generally we are looking at this financial year.”

Falling borrowing costs prompted Kenya to tap global debt markets and rely less on local funding, joining nations from South Africa to Senegal selling Eurobonds. East Africa’s largest economy is facing violence by suspected Islamist militants that’s prompted a slide in tourism, the biggest foreign-exchange earner after tea. Visits fell 18 percent last year following attacks including a deadly September raid by the al-Qaeda-linked al-Shabaab group on a Nairobi mall.

Kenyatta couldn’t confirm the “exact level” of the reduction in domestic borrowing or how much the nation would raise from international markets. Kenyan Treasury Secretary Henry Rotich said in a July 25 interview that a decision on the type of bond and the amount to be issued will be made in “weeks.”

Record Issuance

Sub-Saharan African nations have sold $6.39 billion in sovereign debt this year, compared with $9.7 billion in all of 2013, according to Standard Bank Group Ltd., the continent’s biggest lender. Corporate and government issuance may beat last year’s record of $16.6 billion, Megan McDonald, Standard Bank’s head of debt primary markets, said July 31 in Johannesburg.

Senegal sold $500 million of 10-year debt on July 23, a week after offering sub-Saharan Africa’s biggest sukuk, worth 100 billion CFA francs ($203 million). South Africa and Nigeria are considering Islamic bonds.

Kenya’s plans to reduce domestic borrowing, “should provide some support” for shilling bonds, Samir Gadio, head of Africa strategy at Standard Chartered Plc in London, said in an e-mailed reply to questions. “Tapping the Samurai market makes sense” because of lower bond yields, while Japan Bank for International Cooperation has backed some bond issuers and plans to expand its guarantee program for frontier markets, he said.

Crowding Out

Kenya’s use of domestic funding sources to finance government operations crowds out private industry from taking up more credit and has caused interest rates to climb to “unacceptable” levels, Kenyatta said. The Central Bank of Kenya’s official lending rate is 8.5 percent, while average commercial-bank costs are 16.4 percent, according to data on the regulator’s website.

The World Bank lowered its outlook for Kenyan growth to 4.7 percent this year and 2015 from as much as 5.2 percent as delayed rains curb agriculture production and worsening insecurity scares off tourists. Kenyatta said the economy may still grow at 10 percent by 2017 on expanded infrastructure and institutional reforms that ease doing business.

Fitch Ratings affirmed the country’s creditworthiness at B+, the fourth-highest non-investment grade, with a stable outlook on July 25.

The yield on Eurobonds due June 2024 dropped 65 basis points, or 0.65 percentage point, since they were issued to 6.23 percent by 4:51 p.m. in Nairobi. Average African yields rose 10 basis points over the period to 5.2 percent, according to JPMorgan Chase & Co. indexes. The shilling was unchanged at 87.85 per dollar for a 1.8 percent decline this year.

Before it's here, it's on the Bloomberg Terminal.