Kenya set to repurchase half of $2bn Eurobond this year

Kenya's President William Ruto recently announced the country's plan to repurchase at least half of its $2 billion Eurobond that is due in June 2024. The announcement was made at an international stage, sparking positive reactions in the bond market. However, the move may prove to be costly for the government as the bond prices rally higher. While the buyback plan is seen as a positive step to instill confidence in investors and mitigate default concerns, uncertainties surround the financing of this repurchase. Churchill Ogutu, an Economist at IC Asset Managers, highlighted that the funding for the buyback is likely to come from drawing down approximately $1 billion from the country's foreign exchange reserves. Kenya has seen an increase in external financing inflows over the past months, contributing to a rise in FX reserves to around $7.5 billion. These reserves are expected to be converted to Kenyan shillings to support spending for the current financial year. The fluctuating yield curve of the Eurobond has experienced ups and downs, with the bond trading at premium and discount levels over time. The yield on the 2024 Eurobond currently stands at 12%, down from a high of 21% earlier this year. The recent announcement of the buyback plan is anticipated to further lower the yields and potentially bring the bond prices closer to par value. However, the depreciation of the Kenyan shilling against the dollar has increased the country's debt servicing costs. As the bond payments are denominated in dollars, the depreciating shilling necessitates a higher amount of local currency to service the debt. If the buyback plan is not executed, the National Treasury estimates that servicing the Eurobond could cost Kenya around 20 billion shillings in the next financial year. Furthermore, the recent decision by the Central Bank of Kenya to raise the central bank rate by 100 basis points may not effectively address the underlying issue of FX convertibility risk. Churchill Ogutu explained that Kenya's challenge lies in the ability to convert shillings to dollars promptly, rather than in a traditional interest rate adjustment to attract inflows. This suggests that the shilling may continue to face weakness in the coming months, despite the rate hike. Overall, Kenya's endeavor to repurchase a significant portion of its Eurobond presents both opportunities and challenges in the country's debt management and economic stability.