The oversubscription obtained on the debut
The structure of the Eurobond was a two-in-one transaction, with one transaction of
Going forward, the Eurobond will require
Thereafter the interest will reduce to
The benefits of the Eurobond issue are significant, especially for infrastructure development such as energy, transport and agriculture that require importation of capital equipment.
However, even as we celebrate the success of the issue, we cannot overlook the immense challenges and risks that a Eurobond issue comes loaded with.
In fact, economists are split on the benefits of
Incidentally, among the sub-Saharan countries that have issued Eurobonds, at least two have so far recorded defaults.
One, the costs of issuing Eurobonds are significantly higher than concessional loans that have previously been the main source of financing in
This means the funds need to be invested in projects that have a higher investment return and multiplier effect, in order to avoid a situation where funds would have to be diverted from other sources to service the Eurobond.
The immediate receipt of funds which are currently in the Kenyan accounts means that interest starts to accrue immediately while the benefits of the funds are yet to be realised.
This has not only the risk of carry cost, but also the risk of diversion to projects not previously properly assessed as suitable for funding from the funds. The longer the funds stay in the accounts before deployment to projects, the higher the risk.
The current absorption rate of 45% on development budget is highly expensive for the Eurobond funds and more will need to be done to ensure that projects are implemented in a more efficient and faster pace.
The risk of increasing debt burden calls for a well structured debt management systems. The risk of excessive borrowing is real and has to be managed. Besides, the "bullet" repayments on maturity of the bonds in 2019 for the
There is the risk that the country will not have the funds to repay the loans when they fall due and may be forced to issue more Eurobonds to repay.
This creates a never-ending cycle of debt issuance that does not add value to the economy and that is expensive in term of arrangement and issuing costs.
A volatile macroeconomic environment will also be a risk to the servicing and repayment of the Eurobond.
With good governance, a stable macroeconomic environment will spar economic growth and generate adequate revenues to sustain rising debt levels.
With the Eurobond denominated in foreign currency, the exchange rate will be critical, as the weakening of the Kenya Shilling will result to a higher debt burden with the attendant sustainability challenges in the medium to long term.
Another risk is closely related to the high borrowing costs is the effect on the budget going forward. The Eurobond involves annual servicing costs
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