Bond. Kenyan Bond

A version was published in the Business Daily on Tuesday 22 October 2013 (http://www.businessdailyafrica.com/Opinion-and-Analysis/-/539548/2041704/-/142k628/-/index.html). This, as usual, is the original, fuller version:

One of the issues that has been exercising minds in financial circles in Kenya, and making bond traders the world over salivate, is the prospect of Kenya’s long-mooted bond placement. The stated intent to borrow by the government, which has been on the radar for more than a year, will be of remarkable impact, far beyond the stated billion-and-a-half dollar face value of the principal amount.

To begin with, the bond placement would put Kenya right at the heart of global financial system, with the country (and companies and even counties) able to tap into the deep pools of capital that constitute the global financial market. While Kenya is still considered a frontier market – somewhere beyond the ‘emerging markets’ that are all the vogue – getting on the hamster wheel would be quite an achievement.

However, there are several caveats, even as everyone gets excited about the bond placement. First, getting on that metaphorical hamster wheel means exactly that – policymakers at the Treasury, the Central Bank and State House will soon find that they’re running themselves ragged trying to keep in place. Their every decision will be filtered through the lenses of pimply 24-year-old traders in London and New York and Hong Kong, who will only be sated if government decisions are perfectly aligned to satisfy the gaping maw of the bond markets. By way of illustration, Bill Clinton – bless his adultering heart – is remembered fondly now by Americans because a few key decisions he made at the beginning of his presidency were adjudged wise ones by the bond markets, who were then happy to open their spigots to him and ensure a decade of prosperity for the American economy. Soon, Uhuru Kenyatta will find himself dancing to the same tune, despite whatever other intentions he may have.

Secondly, a successful bond placement might give people ideas. The government might decide (especially if the price is right) that international bonds are a pretty nifty way to fill budget holes, and a lot less humiliating than having to negotiate for aid. Africa is still largely an untested bond market, but the manner in which investors responded a few months ago to bonds placed by Rwanda and Ghana may mean that they’ll turn their gimlet eyes here more and more. And this appetite to go to the international markets may spread downwards, with county governors seeing this as a potential source of funds. If they’re able to make their counties attractive to the international markets, the governors may decide that this is a quick and politically easy way to pay for their expensive plans.

The biggest caveat, however, is whether we will actually be successful in placing our bond. Back in June when this was all the rage, and when it seemed like it would be ready for the markets within a few weeks, everyone who had an opinion said Kenya would raise a billion dollars easily, and at an attractive yield. Rwanda managed to place $400 million at 6.875% (high at international rates, but pretty good for a small, landlocked country). Zambia had managed to raise $750 million at 5.4% (against a target of $500 million and orders of $12 billion). But even then, investors were already becoming wary. By July, Ghana could only be attractive at a yield of 8% - and this is for a country that’s a western darling and which has steady, and growing, revenues from oil.

So, when I had a conversation with Treasury Secretary Henry Rotich that month, he was confident, but cautiously so, that the bond sale would happen at the price and level that he’d planned for.

The looming elephant in the room was the threat that the United States Federal Reserve would halt its $85 billion a month bond purchases (or, in the lingo, begin to taper off). Consensus was that this would happen in mid-September, and this would lead to a flight out of emerging and frontier markets and back into safer – and higher-yielding – US Treasury paper. As it happened, the Fed declined at the September meeting to taper (in a contentious meeting), though not before roiling markets and currencies from Indonesia to South Africa.

One would have thought that the reprieve earned would lead to a sense of urgency in the Kenyan Treasury. But my subsequent conversation with Rotich a couple of weeks ago revealed that our mandarins were still sticking to a relaxed schedule – the process of choosing the investment bank to hand-hold us through the process was taking ages – and it seems that we will end up going to the markets in 2014.

This may mean, then, that we get the worst of all worlds. We would still be at the mercy of the international markets when we’re finally ready, but we would be entering these at a far less friendly time. The Fed’s new taper start date seems to be December, still way before our scheduled date, and we may be looking at double-digit percentages as the only way to satisfy the bond beast.