Long-Awaited Savior or Bringer of Doom: The Eurobond and You.

 

Photo credit: Phillip Brewer/Flickr

Photo credit: Phillip Brewer/Flickr

Local news has been abuzz with mentions of the ubiquitous “Eurobond”, quoted time after time as proof that Kenya is still on the right track financially. For those of you that have nodded silently as your coworkers discussed this mysterious Eurobond, fear not: we’re here to tell you everything you need to know about the Eurobond and what it means for the country as a whole.

At its core, the Eurobond, is of course, a bond: the issuer sets terms to borrow an amount of money at a given interest rate with a promise to pay it back at a set date, referred to as the bond maturing. Interest is usually paid out about twice a year to the winning bidder who the issuer borrows funds from.

Governments can and do issue bonds, but usually in their own currency. When a government issues a bond in a currency totally separate from their own or the currency of the market they operate in, it is called a sovereign bond- or in this case, a Eurobond. These are usually issued in search of lower interest rates available in foreign markets, which works in favor of the issuer. For this case, Kenya also opted to issue the bond in dollars as the dollar has a relatively stable value: currency fluctuations on a loan of this nature could prove catastrophic to the economy upon maturity of the bond.

With the recent issue, the Kenyan government hoped to borrow about $1.5 billion but, as we’re sure you’ve heard in the news, received an overwhelming response of $8 billion from potential investors. This international investor interest, a first for an African country can be chalked up to a number of factors, but the most straight forward would have to be Kenya’s perceived ability to pay back the ‘loan’ when it matures. Aside from a questionably favorable credit rating from international credit rating organizations, Kenya shows potential for growth in current resources as well as newer ones such as the recently discovered crude oil deposits. Kenya’s relatively stable rate of inflation is also of comfort to investors as far as repayment is concerned.

The response to the Eurobond is of course comforting: the international community clearly has faith in Kenya’s growth potential and is willing to put their money where their mouths are. The subscription is a positive step for internal Kenyan development as well. With a fiscal deficit of about KES 342 billion and KES 168 billion raised in local borrowing, the Eurobond steps in to cover the remaining KES 174 billion, Kenya can now comfortably finance government infrastructure, energy or agricultural projects and initiatives for Kenya’s benefit without the economy grinding to a halt. For the individual Kenyan, we can expect to see local borrowing interest rates plummet, cause for celebration among local investors hoping to borrow from banks.

Photo credit: Michael Rieger/ Wikimedia Commons

Photo credit: Michael Rieger/ Wikimedia Commons

Even as we celebrate what seems like a victory for the Kenyan economy, we must keep in mind that the debt burden on Kenya has now intensified, and understand what part we all have to play to ensure its success. Previous Eurobond issuer Ivory Coast defaulted on their loan following a disputed election in 2011, a fact that should hit close to home for Kenya following recent political tensions. A steady hand and wise investment is needed for our economy to actually benefit from the funds. African neighbor Seychelles was forced to default on their own Eurobond in 2008 due to extravagant government spending and a struggling tourism industry, both very real potential threats for Kenya. Mismanagement of this new resource, which Kenya is sadly legendary for, could mean that we will be unable to service the loan when it matures, needing to borrow more from elsewhere in order to uphold our commitment. This would throw the country into a cycle of debt that could very well damage the economy, leaving us at a far worse standing than before.

There you have it folks: on the one hand, the Eurobond may be just what Kenya needs to rise above the 3rd world country standing financially, ushering in a period of economic prosperity for our country. There exists, however, potential for the loan to throw us into a fiscal dark age of devalued currency and staggering debt that will be difficult, if not impossible, to pull ourselves out of. Now that you know the facts, what do you think the outcome will be?

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