Investors Are Unloading Kenyan Bonds as Default Fears Rise

Concerns that Kenya is heading toward default are ramping up.

The extra yield investors demand to hold the nation’s dollar bonds over US Treasuries closed at 993 basis points on Friday، just below the 1،000 level widely considered by bond traders as distressed، according to a JPMorgan index. Intraday data as of 11:35 a.m. local time on Monday showed the premium at 1،019 basis points، according to a JPMorgan index.

The worst performances worldwide

Yields on dollar bonds due 2028 climbed to 14.6%، on track for a 14th consecutive day of increases، the longest streak since the securities began trading in 2018، according to data compiled by Bloomberg. The shilling has also taken a hit، dropping more than 3% in the past month in one of the worst performances worldwide.

“The market is still struggling to see how the financing needs will be met in 2023-4،” said Kaan Nazli، a portfolio manager at Neuberger Berman Asset Management. “We don’t think the fears are overblown.”

Kenya has a principal payment of $2 billion due next year، compared with foreign reserves of about $6.3 billion. The country has delayed paying civil wages amid financing constraints.

Investors had pinned their hopes on syndicated loans، multilateral financing and some support from the domestic market. The government said last week that it was hoping to sell new debt to refinance its 2024 payment، though borrowing remains difficult for junk-rated credits.

A squeeze on funding

No country in sub-Saharan Africa has been able to raise financing through a dollar bond sale over the past year، the International Monetary Fund said in its Regional Economic Outlook report titled “The Big Funding Squeeze” on Friday.

Most single-B rated sovereigns including Kenya have lost Eurobond market access since the Fed started its tightening cycle، fueling investor concerns about their ability to meet large external debt obligations، said Samir Gadio، head of Africa strategy at Standard Chartered Bank.

“If you look at the recent price action، it seems EM high-yield credit has been under significant pressure،” Gadio said. “Some investors have pointed to the pull down effect on Kenya’s bonds as Egypt’s external debt repriced lower.”

The National Treasury and Central Bank of Kenya didn’t immediately respond to requests for comment.

The currency of the East African nation has depreciated 9.7% against the dollar since the beginning of the year and is trading at a record low، according to data compiled by Bloomberg.

“We still expect the Kenyan shilling to remain on the backfoot in 2023،” Citi strategists said in a report. “The level at which it stabilizes will probably critically depend on capital account dynamics، notably whether regional and international capital flows pick up again in 2023-24، while a lower oil price would also help reduce the current-account deficit and be KES supportive.”