Ideally governments rely on taxes collected from its citizens to run government projects and for recurrent expenditures. But its never easy even for the very developed countries to fully finance their budgets. External borrowing is one option governments use to close in on the budget deficit or through internal borrowing, that is from the local financial institutions. Governments tend to shy away from the former due to lots of red tapes, transparency requisite and credit history which is critically analysed. Investors are also very inquisitive of a country’s economy prospect, naturally because its a form of risk to them.
So why does Kenya need the Eurobond?
In order to achieve vision 2030, key sectors such as energy, transport and agriculture will be the backbones of that economy. The bulk of that money will go towards these key infrastructural projects as they are essential drivers in propelling the economy going forward. Funds raised from the bond are also said to be used to settle a sh.52.5billion syndicated loan. The credit market will also witness a reduced pressure from the government and hence lead to reduction of loan interest rates due to markets forces since the government is the biggest borrower. This will also create room for the private sector to borrow money from banks more affordably. The shilling will also leverage on the fortunes of the bond as Central bank of Kenya will have an increased reserve for dollar currency which consequently will reduce its demand. A stable shilling its paramount especially with such an ambitious budget for this new financial year and also in engulfing the economy from external or internal shocks
Its important to note Kenya’s Eurobond has been the most successful so far in Africa’s context. It was oversubscribed by over four times loosely translating to $8.8 billion, depicting investors confidence in the country’s economy. Its split into two, $0.5 million will be paid in 5 years and $1.5million in 10 years
The diversity of Kenya’s economy greatly influenced the success of the bond. I.C.T sector has been growing in leaps and bounds, good prospects in gas ,coal and oil, agriculture, tourism and a relatively stable inflation which somehow managed to withstand shocks triggered by politics and last year’s elections.The country is also said to have an impressive credit rating in terms of meeting its financial obligations. This is critical and one of the obvious things potential investors look for. Pundits in the financial sector project the country will be in a position to pay the pricipal amount upon maturity in the year 2024 so long as the money is utilised prudently.
The government recently announced a new formula in assessing bank interest rates to be known as Kenya Banks Reference Rate (KBRR). This will be an average of the Central Bank Rate (after every announcement by the Monetary Policy Committee meetings) and the 91-day Treasury Bill Rate plus a premium to be determined by each bank. Loan seekers will be also entitled to full disclosure of all bank charges. This is good step by government to streamline interest rates which have been going over the roof as banks laugh all the way with staggering super profits.