Kenya remains high risk despite improving score ahead of Eurobond debut
Kenya’s risks have eased since Q2 in response to the calm electoral process in March. However, the rise in Kenya’s ECR score cannot hide the fact the sovereign and its fellow emerging SSA issuers are considered to have high-risk profiles, according to ECR experts – a discrepancy that could soon be factored into the region’s borrowing costs.
Tier-four rated Kenya has climbed two places in ECR’s 186-country global ranking since Q2 on the back of improved confidence in the sovereign, ahead of an expected Eurobond debut before the year is out.
Kenya’s borrowing appetite could be as high as $1.5 billion, dwarfing Rwanda’s €400 million placement in April and denoting a record-high offering for the region.
Kenya is one of a growing number of countries across sub-Saharan Africa (SSA), since the inaugural listing by Ghana six years ago, that have sought the type of bond financing traditionally the preserve of South Africa, the region’s safest bet.
African issuers have sought alternative forms of financing to the inconvenience of concessional borrowing for their infrastructure development and retiring existing debt, with investors putting to one side the risks in search of portfolio diversification since the global credit crunch of 2007/08 and the ensuing European debt crisis.
However, on a score of 37.4 out of a possible 100, Kenya’s risk profile is still a concern for experts, on a par (virtually) with fellow tier-four issuers Tanzania and Zambia, as well as Burkina Faso and Mozambique.
Only two countries in the region, Botswana and South Africa, are to be found in ECR’s tier three (commensurate with investment grade), meaning that for all other SSA issuers the risks are considered higher than their successful debt placements would suggest – a trend that will be confirmed if Kenya’s debt placement repeats the pattern of oversubscribed demand and comfortable borrowing costs.
However, is this merely deferring trouble ahead? The risks, largely ignored when SSA borrowers come to market and prompting investors to scurry for a piece of the action, are underlined by Cote d’Ivoire’s default in 2011 – from which its risk profile is now recovering, but still flashing warning signs – and a similar fate to have nearly befallen Gabon a year later.
Those might be isolated, country-specific faults, but the vulnerability of many countries in the region to a negative commodity-price shock, weakening current accounts and threatening exchange rate devaluation cannot be overlooked. That assumes, also, that the domestic political climate remains stable, which is never a guarantee in a stormy region noted for its widespread instability.
Kenya’s failings are numerous, according to ECR experts. All of Kenya’s six political risk indicators score less than 5.0 out of 10; its very low scores of 2.9 for corruption and 3.2 for government non-payment/non-repatriation send out clear warnings of the risks involved, which extend to Kenya’s improving, but still high-risk, structural assessment too.
Samir Gadio, emerging markets strategist at Standard Bank, and one of ECR’s experts, is not overly concerned on one level, arguing: “The elections passed off with none of the political risk seen in the past.” In his opinion, “Kenya cannot afford political dislocation” and the trial of the president and vice-president at the International Criminal Court is more a distraction than a primary risk.
However, he acknowledges that macroeconomics cannot be ignored, with low scores awarded for all of Kenya’s economic assessment indicators, especially the government finances at just 3.3 out of 10.
“There isn’t a problem as long as the interest-rate regime manages the exchange rate and inflation, but Kenya, like most countries in the region, does have large twin [budget and current account] deficits,” says Gadio.
Overall, Kenya is still some 10.5 points below top tier-four SSA sovereign Namibia, on 47.9 points, and has lower relative scores for all 15 of its ECR indicators to explain the disparity. Investors might ignore these risks, but on this evidence some caution is warranted.