Kenya’s Gets New Eurobond to Pay For The Maturing One - Money Weekly

It is that time of the week again when we look at the news headlines over the last seven days and dissect those that can affect your money. 

Welcome to yet another edition of Money Weekly.

This week, Kenya goes back to international markets offering a $1.5 billion (Ksh233 billion) bond. The money raised from this bond will be used to pay for the $2 billion (Ksh311 billion) Eurobond due in June. The government also aims to use inflows from other multilateral and trade partners to settle the debt. 

The new Social Health Insurance Fund (SHIF) will be in effect starting March 1. This will see the start of a transitional period between SHIF and the National Health Insurance Fund (NHIF) which is expected to be completed in December.

Kenya has set out a plan to increase diaspora remittances to Ksh1 trillion in the next four years. Remittances grew by 4% last year. To achieve this goal the remittances would have to grow by about 36% over the four years.

Despite tax cuts on cooking gas, the prices continue to be high due to higher global prices and a weak shilling.

The Central Bank of Kenya (CBK) has harmonized the exchange rate reporting and is now using the weighted average of interbank trading to ensure smooth transactions even for bank-to-individual customer exchange.

Avocado exports to China soared tenfold in 2023 compared to the previous year while at the NSE, activity was dampened by the increase in the base lending rate to 13% by the CBK. 

For this and much more. Let’s dive in.

Kenya’s New USD1.5 Billion Eurobond

Kenya went to the international markets to raise funds to buy back the $2 billion (Ksh311 billion) 2014 Eurobond set to mature on June 24 this year. The country sought to raise $1.5 billion (Sh233 billion) from the bond being issued at a staggering 10.375% yield rate. 

The new loan is expected to mature in 2031 but will be repaid in three installments beginning in 2029, 2030, and 2031, bringing the weighted average life of the loan to six years.

This decision comes after two other African countries issued their bonds. However, the 10.375% rate is significantly higher compared to Benin’s 14-year instrument at 8.375% and Ivory Coast’s at 8.5%.

Just a week ago, the tender offer for bondholders wishing to participate in the 2014 Eurobond buyback plan was opened. These are efforts by the government to ensure that it does not default on June 24 while trying to mitigate the Kenya Shilling exchange rate.

Initially, the government had indicated that it would use its reserves to pay the maturing Eurobond. However, using dollar reserves could worsen the exchange rate depreciation since the country will have fewer reserves to cover imports.

Currently, Kenya’s dollar reserves stand at $7.13 billion (Sh1.108 trillion), which equates to 3.81 months of import cover. The current amount of import cover is shy of the required 4 months' worth of import cover; hence, an aggressive drawdown of the dollar reserves is likely to exacerbate the dollar shortage crisis.

The remaining portion of the $2 billion Eurobond will be funded through a mix of government funds and financing from multilateral and bilateral sources, including bank syndication.

Some experts have expressed concerns over the issuance of the new Eurobond, criticising the timing as well as the rate at which it was issued.

Mohamed Wehliye, senior advisor at the Saudi Arabia Central Bank (SAMA), said, “Anything double digit is a bad signal and shouldn’t be allowed. We did a bond that we shouldn’t have done now. We expect to have more dollar inflows than outflows between now and June, and interest rates are coming down.” 

The maturing Eurobond haunts Kenya’s fiscal plans and capabilities. International multilateral organisations seem pleased with the policies being put in place by the country to address the financial strain. Hence, the IMF and other organisations have been supporting the country by providing the dollar inflows Kenya needs to stabilise.

Late last year, the World Bank committed to giving Kenya $4.5 billion (Ksh699 billion) over a period of three years, with the first disbursement of $1.5 billion (Ksh233 billion) expected between March and April this year. The IMF and the Trade Development Bank have issued Kenya with over $1 billion (Ksh155 billion) in the past two months.

In Summary:

• Amount: US$1,500,000,000
• Gross proceeds: US$1,459,050,000
• Coupon: 9.75%
• Price: 97.27% original price discount
• Pricing date: Feb 12th, 2024
• Maturity date: Feb 16th, 2031
• Yield: 10.375%
• Interest payments: Semi-annually on February 16th and August 16th of each year commencing August 16, 2024
• Redemption: Three equal instalments of US$500 million on February 16, 2029; US$500 million on Feb 16, 2030 and US$500 million on February 16, 2031. 

2.75% SHIF Deduction Starts March 1

The monthly 2.75% Social Health Insurance Fund (SHIF) contributions will start this coming month on March 1. SHIF is the government’s new initiative to replace the National Health Insurance Fund (NHIF) in order to provide Universal Health Care (UHC) 

The fund aims to ensure access to medical personnel, medicine, and equipment. The implementation of the fund will see people in different pay brackets contribute significantly differently, compared to their previous NHIF contributions.

• Salaried workers earning up to Ksh30,000 monthly will see a drop of 3% to 45% in contributions
• Salaried workers earning above Ksh30,000 to Ksh100,000 will face an increase of 1% to 77%.
• Salaried workers earning above Ksh100,000 will see their deductions rise reaching up to eight times their current NHIF amount, for some.
• 54% of Kenyans will contribute Ksh300
• The elderly and people with disabilities will receive free services covered by the government.

The transition from NHIF to SHIF is expected to be completed in December.

However, Citi and Standard Group, advisors on Kenya's Eurobond redemption, caution that funding the new universal healthcare could strain the state's expenditure plans, potentially adversely affecting the economy. 

Kenya’s Plan to Net Ksh1trn From Diaspora

Kenya plans to boost its diaspora remittances to Ksh1 trillion in the next four years. In the last five years, remittances from Kenyans abroad averaged Ksh568 billion. 

Notably, last year, remittances grew by 4% to Ksh642 billion. In order to achieve the set target, the remittances would have to grow by approximately 36% over the next four years. 

VAT Return Filing to Be Effective February

Kenya Revenue Authority has adjusted the VAT filing process from January 2024 to February 2024. This is to ensure that all VAT claims are supported by valid electronic invoices from the Tax Invoice Management System (TIMS). The deadline for filing January VAT self-assessment returns is February 20.

Banks to Start Sharing Customer Information With KRA

In a bid to combat tax evasion, KRA, through the tax procedures regulation of 2023, requires Kenyan commercial banks to provide information about foreign account holders. 

This regulation has seen banks implement the Common Reporting Standards (CRS). Through these reporting standards, banks have to report information about foreign account holders, including residence, tax identification number, account balances, details on dividends, other income-generating assets, and the sale of financial assets.

Moi-era Population Control Loan

The Treasury has paid back a Ksh1.9 billion loan taken in 1984 to address population growth. The loan was used to support family planning efforts and the rural health system. 

At the time, Kenya had one of the highest fertility rates of 6.7 children per woman in 1989, compared to today’s 3.4 children. 

Cooking Gas Prices Up Despite Tax Cut

Despite the removal of VAT on LPG by the Finance Act of 2023, gas prices have increased by 1.7% compared to the previous year. 

The marginal increase is a result of the global price rally and a weak shilling, hence cooking gas costs as much as it did without the tax relief.

Fuel Consumption Drops

In the last six months to December 2023, fuel consumption dropped to a five-year low. This drop was a result of the doubling of the VAT and a depreciating shilling, leading to record-high pump prices. 

Pump prices increased by up to Ksh13 per litre following the new 16% VAT effected on July 1, 2023. This led to a 5% drop in fuel consumption from 2.4 billion litres to 2.28 billion litres compared to the second half of 2022.

In the February-March fuel pricing cycle, the Energy and Petroleum Regulatory Authority reduced the price of petrol, diesel and kerosene by Ksh1. In the announcement made on February 14, petrol will now retail at Ksh206.36, diesel will at Ksh195.47 and Kerosene at Ksh193.23 in Nairobi.

Why CBK Changed Its Dollar Reporting

The Central Bank of Kenya (CBK) has shifted to a new formula for reporting foreign currency rates. Previously, there were two official exchange rates, the forex interbank rate and the bank-client rate. 

The two different rates caused discrepancies, especially in bank-client dealings. The CBK will be publishing an exchange rate based on the weighted average rate of all interbank transactions executed on the previous day.

Loan Defaults Drop to 14.8%

Between October and January, the default rate on loans decreased for the first time since the onset of Covid-19. CBK data shows that the overall loan default rate fell from 15.3% to 14.8% within the period. 

Dollar Loans Rise to Ksh1.2 Trillion

Foreign currency loans surged in the quarter ended June 2023 to Ksh1.2 trillion compared to the same period the previous year, Ksh1 trillion. This is a result of the dollar shortage in Kenya. 

Businesses opted for dollar-denominated loans to mitigate risks, which led to a growth of 19.8% in foreign currency between April and June 2023. Manufacturing held the highest share of these loans, followed by trade, transport, and communication.

CBK Projects Ksh734bn Inflows This Year on Foreign Investors

The CBK estimates this year's foreign inflows at Ksh733.9 billion ($4.6 billion). In 2023, foreign currency inflows stood at Ksh558.4 billion (3.5 billion). The projected rebound is attributed to increased disbursements from multilateral lenders, improved partnerships with development partners, and the return of foreign investor flows. 

Dollar Deposits in Banks Hit Ksh1.5 Trillion 

Dollar deposits in Kenyan banks surged by 68% to a record Ksh1.55 trillion in the 12 months ending December 2023. This was driven by a weakening shilling and the accumulation of foreign currencies. 

The dollar appreciated by 27% against the shilling in 2023, resulting in significant capital gains for depositors. The rise in dollar value poses a risk for banks' capital buffers, while forex loans to customers are assets.

Loan Defaults in Kenya Hit New Record

Loan defaults surged by 27.4% (Ksh133.6 billion) in the fiscal year ending December 2023, surpassing levels seen during the Covid-19 pandemic. The increase in loan defaults from Ksh487.7 billion to Sh621.3 billion marks the largest increase in a single year since the Central Bank of Kenya (CBK) began publicising the data.

Bank Deposit Interest Rates

Elevated interest rates on various investment classes, including Treasury bills and bonds, have led banks to raise deposit rates to attract and retain high-value deposits. Returns for cash-rich firms and high-net-worth depositors increased to double-digit levels, reaching a 24-year high record. The average commercial bank deposit interest rate hit 10.1% in December 2023.

10x Growth in Kenyan Avocado Exports to China

Kenya’s avocado export to China surged tenfold reaching 4.3 billion tonnes from 443 million tonnes in 2022. The first avocado export to China was made in 2022 unlocking a huge market for Kenya. In 2023, Kenya also made its first export to India. The Avocado Association of Kenya anticipates that the European market will continue to be Kenya’s biggest market.

Sugarcane Supply to Factories Rises

Sugarcane delivered to factories in December reached 610,020 tonnes, the highest in 2023. This was after a four-month ban that was lifted in November. The ban was instituted in July to prevent factories from crashing immature cane.

Maize Prices Fall 12.7%

The subsidy program and the improved local harvest led to maize prices dropping by 12.7% in 2023. The average price of a kilogramme of maize dropped from Ksh80.5 in 2022 to Ksh70.2 in 2023. Consequently, the price of a packet of sifted maize flour dropped 14.9%.

Livestock Feeds Fail Quality Tests

The Kenya Bureau of Standards (KEBS) has raised concerns over the quality of livestock feeds in the market. After testing samples of animal feeds they found over 50% lacked proper formulation and adherence to standards. Small and medium-sized firms, as well as feeds made at the farm level and sold in agrovets, were identified as entities flouting the standards.

CBK Rate Rise Dampens NSE Prospects

CBK’s decision to raise the interest rate to 13% has dampened trading activity on the Nairobi Securities Exchange (NSE). Investors are now shifting away from equities and towards fixed-income assets. 

Following the announcement, the NSE recorded a loss of Ksh9.8 billion in paper wealth Over the week, the equities market saw a total valuation loss of Ksh16 billion. Analysts anticipate a continued preference for fixed-income assets, with expectations for a rebound in equities market activity in the second half of 2024.

More News in a Snapshot

Counties’ Permit Fees

Rural counties have been observed to have the lowest business licence fees. This is a vivid contrast to cities such as Nairobi which charge up to 4 times for business licences. Some of the counties with the least business licence charges include Bungoma, Uasin Gishu, and Kakamega. Nairobi, Nakuru, Mombasa, and Kisumu showed to have some of the most expensive business licences.

Kenyan Exports Fall

Last year saw a decline in Kenya exports by 2.2% reversing the 9.3% rise in export earnings recorded in 2022. The drop was recorded despite a weaker shilling that was expected to incentivize exports since exporters could earn more after converting their earnings to the local currency. This is the first time that Kenya’s exports have declined in four years.

Second-Hand Cars Price Surge

Over the past four months, the prices of second-hand cars have surged by as much as Ksh600,000. Provisional data from the CBK and the KRA indicate a $162 million (Ksh25 billion) reduction in spending on car imports by Kenyans. This has led to a growing trend among car buyers to opt for locally available units that exceed eight years in age, which is the import limit.