Kenya has strong vote of confidence from investors

National Treasury building in Nairobi. Last week, Kenya priced its second bond in the global financial markets, and was greeted with overwhelming investor confidence. FILE PHOTO | NATION MEDIA GROUP

What you need to know:

  • In our engagement, investors were satisfied that the Kenyan economy had shown its strength and resilience in the last five years.

  • President Uhuru Kenyatta’s Big Four agenda is our goal – raising the share of manufacturing in GDP to 15 per cent by 2022.

  • The bond will be listed on both the Irish and the London Stock Exchange markets, enhancing transparency and giving Kenya visibility in the global markets.

Last week, Kenya priced its second bond in the global financial markets, and was greeted with overwhelming investor confidence. It is now common knowledge that while we sought $2 billion (Sh202 billion), investors made available to us more than $14 billion.

We have heard many voices, some informed and a few misinformed and distorted, comment on the bond in relation to the stability of our economy.

We have seen headlines in the past few days dwelling on the question of overall repayments over 30 years without assessing the growth the bond will fuel.

Investors know the strength of Kenya’s economy.  Throughout our international road show to the US and Britain, investors were keenly interested in our plans to sustain our rapid economic growth; to reduce the fiscal deficit and further strengthen our debt position; to sustain our strong external reserves position to cushion against external shocks; and address the slowdown of credit to the private sector in light of the interest-rate cap.

These questions are not new, nor are they confined to foreign investors. Every Kenyan also wants to know what we are doing to reduce the cost of living, and to put more money in their pockets.

RESILIENCE

Of the many questions asked by investors during the road show, I will address four.

First, in our engagement, investors were satisfied that the Kenyan economy had shown its strength and resilience in the last five years, even in the face of drought and other exogenous shocks. The economy grew by an average of 5.5 per cent per year between 2013 and 2017, outperforming the average growth rate of 4.7 per cent per year in the 2008–2012 period. Further, the growth of the economy surpassed, by a wide margin, that of the sub-Saharan African region, and the global average.

That success reflects the broad base of our economy, driven largely by strong growth in non-agricultural sectors.

Indeed, the non-agricultural sector’s real gross domestic product (GDP) has grown by an average of six per cent per year over the last five years, reflecting the sustained implementation of government policies.

These policies include maintaining macroeconomic stability, and especially stability in inflation, interest rates, and the exchange rate; improving the investment climate; and increased investment in security that is directly responsible for revitalised investments and the tourism sector. Tourism income for the last year jumped more than 20 per cent, for instance, despite a prolonged election period.

POLICIES

Other policies include investment in key infrastructure projects such as air and sea ports, the standard gauge railway, roads, cheaper and more reliable energy; and sharing prosperity through enhanced spending on education, health and the cash transfer programme for our elderly, orphans and vulnerable children, and the disabled.

Finally, the continued support to make devolution a success has contributed to the strong performance of the economy, with services and resources directly reaching the grassroots.

On the way forward, our message to investors and Kenyans is the same. President Uhuru Kenyatta’s Big Four agenda is our goal – raising the share of manufacturing in GDP to 15 per cent by 2022; ensuring food security; building at least 500,000 units of affordable houses; and ensuring universal healthcare for all. Implementation of the Big Four agenda will accelerate present growth, create new jobs, and facilitate shared wealth among all Kenyans.

FISCAL ADJUSTMENT

Investors were pleased that the funding of the agenda would come primarily through the public-private partnership framework, and not from additional government spending. A majority of Kenyans feel the same.

Second, investors wanted to know about our proposed fiscal adjustment. Prudence and greater efficiency in the management of our resources remain the Treasury’s priorities. We are working to cut the fiscal deficit, from around nine per cent of GDP in 2016/2017 to about three per cent by 2021/2022, by a combination of revenue measures and strict adherence to expenditure controls. These include planned reduction in recurrent costs while sustaining development spending.

The proposed fiscal consolidation is designed to ease the debt-to-GDP ratio from the current peak level of around 52 per cent of GDP to 43.8 per cent of GDP in the 2021/22 (July/June) fiscal year. The bottom line is that we must invest prudently what we borrow, so that we can grow our economy and increase our productivity as a country.

IMPROVED EXPORTS

Third, investors welcomed the recent narrowing of our current account deficit as a result of improved performance in exports of goods and services – including, tea, coffee, horticulture, tourism and diaspora remittances. This, accompanied by significant capital and financial inflows, built up our international reserves to around $7.3 billion (Sh744 billion) by December 2017 which is equivalent to 4.9 months of import cover. Financial markets agree that the level of reserves is sufficient to handle most external shocks.

Of course, it would be good to see Kenya reach an agreement with the International Monetary Fund (IMF) on a precautionary arrangement that offers additional external buffers. We are pursuing that with an IMF team currently in Nairobi, but we do not need the money right now. 

Fourth, the interest rates cap regime has raised questions since its inception. We are arranging a financial sector reform package that will address the root cause of high interest rates; consumer protection issues; and credit to small and medium-size enterprises. The proposed package will address the recent slowdown in credit to the private sector. Credit is a vexing question to all Kenyans, so we are keen to see stakeholders agree on measures that will make credit available without breaking any bones.

CONFIDENCE

In sum, the great interest shown by foreign investors in purchasing the Kenya government bond is a strong vote of confidence in the management and performance of our economy.

We are alive to reasonable concerns about debt sustainability, but we can assure Kenyans that first, transforming lives requires heavy investment, and, second, that we will do everything possible to ensure the money – all the money – goes to designated projects.

This prudence is familiar to Kenyans. We take loans from Mshwari, and there is a cost to it. Your car loan has a cost to it; your business loan has a cost to it; and your mortgage has a long-term cost to it. If you use your money for the investment it is meant for, it will pay. That’s what we are doing in respect to this bond, or any other debt we take.

DISCLOSURE

For investors and my fellow countrymen and women chasing the numbers, let me clarify the position.

Last week, the government successfully priced a new $2 billion, dual-tranche sovereign bond – a 10-year and 30-year. This followed extensive engagement and consultation with hundreds of investors in the US and UK. Treasury Cabinet Secretary Henry Rotich launched the secondary trading of the bond at the London Stock Exchange on February 22. The bond will be listed on both the Irish and the London Stock Exchange markets, enhancing transparency and giving Kenya visibility in the global markets.

In line with the budget approved by the National Assembly, the proceeds are for this financial year’s development expenditure, and to pay off existing syndicated commercial loans. The settlement of the syndicated loans is in line with the Treasury’s objective of liability management, which includes lengthening the maturity of public debt.

ECONOMIC STABILITY

The yield on the 10-year tranche of $1 billion (Sh101 billion) was set at 7.3 per cent, while that of the 30-year bond, also amounting to $1 billion, was set at 8.3 per cent. These are market competitive prices. The issuance of a 30-year bond has now established a visible yield curve for the country, and in effect provides Kenyan corporates with a benchmark.

This is also a major step in terms of the global investor view of Kenya’s long-term economic stability.

The $14 billion (Sh1.4 trillion) order book that Kenya received is the largest ever generated by a sub-Saharan African country. Attaining the 30-year tranche puts Kenya ahead of every African country save Nigeria and Egypt, who only recently issued 30-year bonds, in November 2017 and February 2018 respectively. 

This successful issue confirms strong investor confidence in the government’s management of the economy, and shows their expectation of a strong and vibrant economy, ready for long-term investments.

 

Dr Thugge is the Treasury Principal Secretary