Wednesday, 28 February 2018

Kenya confounds critics, raises $2 bn Eurobond

 Work on Nairobi -Naivasha section of SGR

 Kenya last week shook off negative news about its economy to raise US$2 billion in the second issue of a Eurobond in four years.

 The initial bond issued in 2014, was also met with bad news following an attack by “Al-shabaab” in Mpeketoni, Lamu, where 100 people were killed. The attack was seen in some quarters as an attempt to sabotage the issue, coming the day the issue opened.

The Market shrugged off the bad news bidding $8 billion. This time around, the country shook off a downgrade of the bond by Moody’s and the withdrawal of a standby facility by IMF. The recent issue was oversubscribed seven times, with bids totaling US$14 billion. There is also a feeling that the bad news was also designed to sabotage this issue.

 The success of the second issue has critics scrambling for metaphors.  if they had the sabotage of the second issue on the bad news, then they must be a disappointed lot. And now, they are harping on the country's alleged indebtedness to safe face. 

LTWP power station: Funded entirely by debts
The bad mouthing that characterized the first issue is also common with the second. The 2014 issue has been dogged by allegations of wrongdoing, with an allegation that US$1 billion was actually stolen. No evidence was ever provided to support the allegations. But the allegations continue. The second issue is being criticized for adding to the country’s debt burden.

The shake-off is a reflection of the horizon perspectives between traders and investors. Traders count the profits at the end of the trading day. Investors have a longer-term view, looking at the rate of return over a longer period rather than the difference between purchases and sales at the close of business daily.
 Investors have shaken off fears about the debt-to GDP ratio approach which traders are worried about. The ratio, which according to anti-debt activists is 54 percent, is said to be headed towards unmanageable levels.
Investors do not think so. They heard that before. The question is: how do the economic fundamentals look like? They are firm and looking good. Where will the money go? To be invested in infrastructure. Infrastructure is enablers of economic growth. That is it! The future looks bright.

But the Debt-to GDP ratio is still causing concern. However, there are two ways of lowering it: Fast economic growth while holding the debt levels low or cut borrowing and allow slow or static economic growth rate.

 Kenya has chosen to borrow to hasten economic transformation and set the stage for fast growth in the future through borrowing. Borrowing is bringing the benefits of future earnings to the present. 
 Kenya's borrowing  is anchored on her long-term development strategy whose aim is to create a “Globally competitive and prosperous country with a high quality of life by 2030.”   The idea is to shift the supply curve outwards to a new level of increased goods and services. That is, expand and diversify economic activity. Kenya’s GDP is expected to hit $120 billion by 2025, almost double the current level. That level will not be achieved unless the current bottlenecks are removed.

 Currently, agriculture, the driver of the economy is not operating at full potential. The manufacturing sector is also reeling under the weight of heavy costs. These inefficiencies are blamed on poor or insufficient infrastructure- energy, transport infrastructure, water, you name it.

This means massive investment, especially in infrastructure- and infrastructure is expensive. The country cannot provide the needed infrastructure from our tax revenue, even if a huge chunk of it went to infrastructure.

In fact, the current budget proposal gives the Ministry of transport, infrastructure, and housing Lion’s share of the budget in the coming financial year and probably beyond. And this will not be enough to build 10,000km of roads, seaports, airports, railway lines, water dams, and homes! That means some money has to come from elsewhere. There are only two options: bring in the private sector through PPP or borrow from them to invest.

 Given that investors have no stomach for sunk capital risk in areas such as generating geothermal power, the government has to take the risk and that means borrowing funds to sink in developing such sources. Borrowing from bilateral and multilateral lenders is almost out of the question for a country in a hurry to develop. The resources are not available from these sources because they also face budget constraints.
Smooth  and faster roads: Funded by debt
 Africa’s multilateral lender, AfDB, in its 2018 African Economic Outlook encourages Africa to tap into the US$100 trillion in savings held by Institutional investors and Commercial banks. Among the instruments it recommends is sovereign borrowing and PPPs.

To be sure, it cautions against creating personal monuments- projects that have no potential economic benefit but are politically palatable. And that is what everyone should be fighting against. It calls on Africa to invest in profitable Infrastructure to transform and industrialize Africa. It lists investment in the order of priorities as Energy, transport infrastructure and water. These are also the priority projects in Kenya.

So what is wrong with borrowing? Nothing! If invested in productive projects. Is there any evidence that borrowed funds have been wasted? We are yet to see it.  But we see goods roads, increased power supply, new railway lines and rolling stock, improved harbours, and water dams. Critics need not look far, Thika Highway was funded by debt, we are enjoying jam free rides. The Lake Turkana wind power project, worth US$786 million was funded entirely on debt. Come August and the project will add some 310 Mw in the national grid and, given its large size, we could soon see lower electricity bills. All these are infrastructure that enables economic prosperity as they cut the cost of doing business and create more jobs.
Therefore the question of not being able to repay the debts once the projects are up and running does not arise. The major concern should be that the projects are completed in time so that the country can enjoy the envisaged benefits and help repay their debts.


 The Standard Gauge Railway between Mombasa and Nairobi was completed 18 months ahead of schedule and the Nairobi- Naivasha section will be completed three months ahead of schedule. This eliminates cost-overruns and at the same time gives the country a bonus. The Nairobi Mombasa line has been operational for eight months now. This is because the funds are available and ring-fenced for the projects. Those funds were made available by borrowing.

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