Kenya: Lessons from the Inaugural Infrastructure Bond Auction of 2021

The 16-year infrastructure bond (IFB) sale really surprised me! A whopping KES 125.34Bn in bids was received against the KES 50.00Bn targeted. The CBK successfully absorbed KES 81.05Bn. Pricing was within expectations with the weighted average rate of accepted bids recorded at 12.257%.

What we can learn from this auction is:

1. There is a TON of liquidity in the market seeking quality investments. The IFBs tax-free allure is one of them especially now that taxes have reverted to pre-COVID levels.

2. Aggressive yield search is a reality. The IFB sold about 80bps higher than the prevailing rate on bonds (trading in the secondary market) with similar tenors at the time.

3. The above target absorption of bids, around KES 31Bn more than intended, suggests that the government’s appetite for debt remains healthy.

4. However, picking from the third point, the government is (somewhat) sensitive to the cost of its debt accumulation. The market-weighted average rate of all bids received was 12.407% but the average rate of accepted bids was 12.257% (see the difference?).

5.That said, with the six-month debt repayment holidays (from Paris Club creditors and now China), the government’s debt appetite may somewhat moderate during this period.

6. Even then, there still remains existing debt that needs to be settled as well as ‘big old’ spending – on the economic recovery, BBI, upcoming 2022 election, and as the President mentioned recently, the KES 2.00Bn lost each day through corruption/misappropriation – that needs to be offset by borrowing.

7. Even with a reversion to pre-COVID taxes, spending will continue to outpace revenue collections as has always been the case.

8. This should sustain the upward adjustment of the yield curve though the rise, at least in the short term, will be curtailed by the current abundance of cash in the market.