By Jane Wachira
A Eurobond according to financial time’s lexicon is a bond that is sold outside the country of the currency in which it is denominated. The euro part of the name derives from the fact that Europe was the first place where such bonds (nominally denominated in dollars) were sold. It is not to be confused with bonds denominated in Euros.
It is also an international bond issued in Europe or elsewhere outside the country in whose currency its value is stated (usually the US and Japan). The term euro is also used to simply refer to the international aspect of the bonds, the currency in which it is issued determines its name e.g. Eurodollar (US dollar) or euro yen (Japanese yen). Kenya’s is a Eurodollar bond. Eurobonds are free of withholding tax and are traded electronically in the secondary markets across international financial centers.
In April 2014, Rwanda became the first East African nation to sell a Eurobond, raising $400M of 10-year notes at a rate of 6.92%. In July, Nigeria in West Africa sold $500M of similar maturity securities at a yield of 6.60%. In June 24, 2014 Kenya acquired the Eurobond as well; it had been in the pipeline for seven years. Initially the country sought to raise $1.5billion, but eventually raised $2 billion, breaking the record in the whole of Africa’s history. This is after it attracted bids four times its target. US investors bought about two thirds of the bonds, with British investors taking a quarter. It was to be paid back in five and ten years with interest on an annual basis and the principle amount at maturity i.e. $500million five-year securities that will price to yield 5.875% and $1.5 billion of a ten year bond at 6.875%.
The government through the Central Bank of Kenya (CBK) gave the private investors a piece of paper known as a bond, and in return CBK collected on the government’s behalf $2 billion cash in the form of a loan. The proceeds of the transaction were to be used for general budgetary purposes, funding of infrastructure projects which included geothermal development, road and rail link to quell the huge infrastructure deficit and the repayment of $600 million syndicated loan in 2011/2012 that was to mature later in August that year.
Among others, the Eurobond was aimed at accelerating economic growth and poverty reduction. Infrastructure projects would increase revenue earnings and create employment opportunities. It would lower the interest rates in the country and stop the government from borrowing from domestic markets.
The money, President Uhuru Kenyatta promised, would be put into good use in ways that would bring about positive momentum to the country’s economy. It would also elevate Kenya’s credit worthiness in capital markets thus attracting more foreign investors.
The challenges that accompanied the uptake of the Eurobond were; whether the money would be put into effective and efficient use; the risk referred to by economists as the ‘original sin’, this doctrine warns against borrowing in a foreign currency when you do not have sufficient earnings in that currency that will service the debt. The bond was issued in dollars yet we spend and collect taxes in shillings hence high foreign exchange risks. In a situation where the shilling substantially depreciates against the dollar, which is what the Eurobond is denominated in, the cost of servicing and repaying the bond becomes much higher and could impact on debt sustainability.
One year down the line, we are experiencing all the anticipated negative effects, with bank interest rates going haywire, Standard Chartered Bank interest rates rose from 17.5% to 27%. The value of the shilling in relation to the dollar has dropped significantly with $1 going for between Sh100 and Sh102. Further the Eurobond billions can neither be accounted for in infrastructural developments nor in energy, transport and agricultural projects.
The Auditor General, Mr. Edward Ouko expressed fears in his report that the $2 billion received in June 24, 2014, could have been stolen since it was not deposited in the Consolidated Fund. It was deposited in an offshore account contrary to Article 206 of the Constitution of Kenya and section 17(2) of Public Finance and Management Act 2012, which require that all money raised or received by or on behalf of the National government be paid into the consolidated fund. In July, out of the Sh210 billion, Sh34.6 billion was moved to the exchequer to fund infrastructure development, while Sh53.2 billion was withdrawn to fund the syndicated loan.
His counterpart, the Controller of Budget, Ms. Agnes Odhiambo concurred with him and raised questions of the use and whereabouts of the Eurobond’s Sh176 billion. She also testified that the money was deposited in an offshore account over which she had no power. This is not all; there was a substantial deficit of Sh600 billion which was to be funded through domestic borrowing. Earlier, in May 2014 the government had received from China a loan of $5 billion dollars, to fund the standard gauge railway.
In 1987, Kenya’s total debt stood at $5.9 billion representinf 77% of its gross national product (GNP). In 2008 the public debt stood at Sh.867 billion.
Fast forward to 2015, according to National Treasury data dated March 2015, the Jubilee government had borrowed Sh874 billion between 2013 and 2015, overtaking former President Kibaki’s regime, which borrowed Sh738 billion in the entire period of the Grand Coalition Government.
In August 2008, with a population of 36 million, each Kenyan bore a debt tag of Sh24, 083 of public debt. In July 2014 with a population of at least 40 million people each person bore a debt tag of Sh75, 000. Kenya is currently heralded by debt, foreign as well as domestic. The country is currently in a cash crunch, and could be headed the Greek way.
The Greek sovereign great depression saw the European country go broke. Kenya could be exhibiting early signs of the same. Greece has often been depicted as the cradle of political democracy and the birthplace of western civilization. It is the land of Plato, Socrates and Aristotle, men whose thoughts define philosophies that influence much thought on socio-economic, political, spiritual and cultural life today. Greece is stuck in indebtedness to fellow European countries unable to pay off its debts and live within its means.
The Greek debt crises of 2010 was triggered by high budget deficits that reached 13.6% of GDP four times the amount allowed by the EU and high national debt levels reaching 300 billion Euros, representing 124% of the GDP. This high spending, mainly funded by other European counterparts, was done to heighten the luxurious lifestyles of Greeks, causing furor throughout the region when the Greek debt crises threatened to collapse the entire Euro zone. A highlight of the events that led to the crises include, macro-economic developments characterized by weak economic activity, very high inflation, very high real and nominal rates and low fixed developments.
Fiscal developments included very high general government deficits and fast accumulation of debt; the ratio increased from 69.0% in 1989 to 110% of GDP in 1993 and with very high interest payments. Upon securing the EMU (European Monetary Union) membership the general government deficit declined even further and interest rates sky rocketed.
Greece had entered the EMU with two key weaknesses; the debt-to-GDP ratio was too high exceeding 100% of the GDP and; the institutional framework which determined fiscal outcomes was extremely weak, actually non-existent. When the financial crises began in 2009, the Greek economy had contracted by 0.3%. National debt had risen to 262 billion Euros from 168 billion Euros in 2004 and was projected to rise to 124% of GDP in 2010. Its deficit reached 12.7% of GDP, more than four times the stipulated EU amount. They ruled out bilateral loans and instead announced a wider austerity package including a freeze on public sector pay and higher taxes for low and middle-income households.
These traps could have been avoided by increased fiscal discipline and increased competitiveness of the economy, Greece did neither. Long-term problems included continuous deficits for the last 36 years, and high and rising public debt. There were plenty of warnings but Greece took no action. The same is and has been happening to Kenya.
There have been successive debts from regime to regime since independence, corruption scandals with highlights being the Goldenberg, Anglo leasing, the Grand Regency Hotel scandal (now Laico Regency) and the current NYS scandal where 791 million is missing.
We have a government that is spending well above its means characterized by heavy borrowing with no accountability for usage resulting to high public debt. The country is experiencing a rate high of inflation with the prices of basic commodities skyrocketing.
During the Great depression in the US, President Theodore Roosevelt initiated the New Deal for his first hundred days in office. This saw congress pass fifteen major Acts to meet the economic crises. Inter-alia the Emergency Banking Relief Act which restored the people’s confidence in banks and the National Industrial Recovery Act which was a blue print for industrial recovery through controlling industrial production and prices with industry created codes of fair competition. The positive effect of these Acts is felt to date. This is what Kenya needs, a new deal.
Currently, the government has the discretion to borrow from foreign finance markets without consulting the CBK, yet it is the CBK that will pay back the loan. There is a need to put in place stringent measures that ensure a loan is used for its targeted purpose and that the same is realized. The increasing appetite for debt has to also be tamed. We are not in Greece’s place yet, we however could be headed there if our debts become unsustainable and we cannot service them. We can avert the looming debt crises if we act now.
As Theodore Roosevelt put it while introducing the new deal “the country needs and unless I mistake its temper, the country demands bold and persistent experimentation. Its common sense to take a method and try it, if it fails, admit it frankly and try another. But above all try something”.