The Importance of the Eurobond Mystery

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This article first appeared in my weekly column with the Business Daily on November 1, 2015

In June 2014 Kenyans were given the impression that the issuance of the USD 2.75 billion (KES 269.5 billion) ‘Eurobond’ would be of great use to the country and economy. Not only did government state that it would be used to fund infrastructure, it would also allow them to pay off onerous debt. Government linked the bond to lower domestic interest rates stating they would not borrow domestically because of liquidity offered by the bond. Then last month the government announced that they were going to borrow heavily domestically and acquired a two-year, KES 77.43 billion syndicated domestic loan. Some banks responded by raising their interest rates rubbishing the ‘low interest rate’ Eurobond promise. This is when questions around what happened to the proceeds of the bond intensified and hard questions asked.

(source: http://apolloassetmanagement.co.ke/wp-content/uploads/2014/07/euro-bonds.jpg)

The National Treasury Cabinet Secretary Henry Rotich argued that KES 196 billion from the bond went into infrastructure and another KES 53 billion deposited in a foreign account intended to pay off external debts. Yet the Controller of Budget told Parliament that an estimated KES 176 billion could not be accounted for; and although KES 53 billion had been withdrawn to ‘pay off loans’, this was done un-procedurally. Many Kenyans know most of this but what many Kenyans do not know is that the bond is costing them KES 16.4 billion in interest payments as of July 2015. Kenyans are hemorrhaging money to service a debt for which there is no clarity as to how precisely it is being used. How is this acceptable?

The mystery of where the Eurobond billions went is important for three reasons; firstly if the money is not being used as planned, will the ‘alternative use’ generate sufficient returns to service the bond particularly when it matures? The bottom line is that if the bond does not generate the economic activity required to raise revenue such that government meets its obligations, then that money is likely to come out of revenue intended for other purposes. Global financial markets are not patient development financial institutions that entertain ideas of ‘forgiving’ debt. The Eurobond must be paid and will be paid and if government has to dip into national budgets to do so, then so be it. This factor alone should cause sufficient concern in the minds of Kenyans.

(source: http://orientalreview.org/wp-content/uploads/2014/09/debt.jpg)

Secondly, given the uncertainty surrounding the Eurobond, how can it be ensured that the country will reap the economic and development dividends that apparently motivated the bond issuance in the first place? Kenya needs infrastructure; that was not a hard argument to make and perhaps informed the bond’s oversubscription. But for a government that seems to believe in the ‘multiplier effect’ of infrastructure and promised as much, this expectation is yet to be met by reality. Where is the multiplier effect? GDP growth is insipid; and what precisely is the progress on infrastructure projects? If Kenya does not execute progress on what was essentially an infrastructure catch up plan devised by government that informed the bond issuance, then any potential catalytic effects of the bond will obviously not be felt in the economy.

Finally, this Eurobond debacle is going to inform the Kenya government’s reputation globally- a reputation that has already being hammered in recent times. It was absolutely crucial that the Eurobond be handled meticulously–particularly given that it was the country’s debut sovereign bond. Meticulous management is not the sense one gets when looking at this issue. The other concern is that potential fiscal mismanagement may fall out into the rest of the economy and raise questions as to whether Kenya is a credible investment destination, period.

There is a need for clarity to be brought to the Eurobond mystery not only because doing so will make many of us sleep better, but because Kenyans are owed an explanation as to how their money, which is servicing the bond, is actually being used.

Anzetse Were is a development economist; email: anzetsew@gmail.com

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