Kenya’s Development Bond Sale Will Be Key Market Confidence Test
Kenya is set to test investors’ appetite for its debt Wednesday with an auction of infrastructure bonds, its first since a wave of anti-government protests led authorities to scrap a crucial tax-raising plan.
The auction of 50 billion shillings ($387 million) worth of securities maturing May 2030 and February 2040 will be closely watched, as it comes shortly after credit rating downgrades from Moody’s Investors Service and Fitch Ratings.
Both agencies cut Kenya’s credit score deeper into junk in response to authorities’ decision to abandon the revenue plan after protests killed scores of people across the country.
While the finance ministry says it’s trying to revive some of those tax measures, concerns over the budget deficit remain, driving up the premium investors demand to hold Kenyan assets.
Infrastructure bonds — tax-free securities that were launched to finance development projects — are no exception, with yields on on the outstanding 2040 issue up 140 basis points since the protests erupted in mid-June. That bond currently trades with a yield of about 18.16%, up from 14.41% in April 2023 when it was last tapped.
Given lackluster demand at Kenya’s recent government bond auctions, Wednesday’s sale will be crucial to gauge appetite for securities that have generally been popular with investors. At the last auction of infrastructure bonds in February, the central bank accepted bids for three times the amount on offer.
Samir Gadio, head of Africa strategy at Standard Chartered Bank, expects demand at Wednesday’s auction to be driven by local investors, with turmoil on overseas markets adding to domestic risks. At least half the allocations in the February auction went to foreigners, he estimates.
“Given recent global risk-aversion, fresh portfolio inflows could be constrained, but the extent of coupon reinvestment by foreigners into the infrastructure bond auction will matter,” Gadio said.
Analysts note that the shorter-dated 2030 bonds have fared better, with yields holding relatively steady around 17.91%. That’s in line with weekly debt auctions, where investors have overwhelmingly favored short-maturity treasury bills.
The Nairobi-based AIB-AXYS Africa brokerage said it expects demand at Wednesday’s auction “to be moderately skewed to the shorter-duration infrastructure bond, as investors weigh the medium-term risk landscape.”
The outcome will also be key for the shilling, which was boosted in February by auction proceeds. The currency has strengthened about 3% since July 25 when the bond sale was announced, having weakened the month before as the protests raged.
