Kenya will issue the delayed sovereign bond in the coming financial year to cut its borrowing from the domestic market and avoid crowding out the private sector.

The Government hopes to rake in Sh14.2 billion from the issue in the 2010/2011 fiscal year which begins in July and Sh15.7 billion the following year.

In its Budget Policy Statement—the country’s medium term economic forecast—now before Parliament’s Budget Committee, Treasury plans to use the bond to boost its rating externally as it tries to find the right financing mix to lift the fragile economy and fix it gaping budget deficit.

Worsening global economic conditions have for two years now frustrated the issue, but Finance minister Uhuru Kenyatta is optimistic time is ripe.

“If the global financial conditions improve sufficiently, Kenya will consider issuing an international sovereign bond to benchmark the country externally,” said Mr Kenyatta in the statement, adding the money from the issue would be spent on projects earmarked under a government long-term development plan dubbed Vision 2030.

Analysts reckon that the planned sovereign bond will open up an avenue for the local corporate players to access the international bond market much more easily as the basic benchmark would have been set by the sovereign bond.

“The sovereign bond will open up to the corporate world the opportunity to tap into the global fund market more easily,” said John Ngumi, Standard Bank Africa director of investment banking .
In his projections, Mr Kenyatta sees Kenya’s budget deficit narrowing to 5.5 per cent of the GDP in the next fiscal year from 6.6 per cent in 2009/10 helped by accelerated growth.

This would see the deficit stand at Sh153.5 billion, down from Sh168.2 billion with net external financing of the deficit coming to Sh51.6 billion—made up mainly of concessionary loans.

According to Mr Kenyatta, the balance of Sh101.9 billion will be financed through domestic borrowing of about Sh95.3 billion which includes domestic infrastructure bonds of Sh28.6 billion.

“This leaves a financing gap of Sh6.6 billion which will be closed through improved revenues when the macroeconomic forecast is finalised,” he said.

The planned issue comes at a time when Treasury has already busted its domestic borrowing target for the current financial year, a pointer that it might take in more debt in the coming months to meet rising public expenditure needs.

With domestic borrowing past the Sh109.5 billion mark that Mr Kenyatta set in the budget by Sh250 million according to official figures, questions are rising over the country’s ability to cope with the debt.

Heavy borrowing by the government is usually associated with high interest rates that arises from the crowding out of the private sector from the debt market.

Experts however said the success of the issue is also hinged on the improvement of the political environment which has over the past several months been soiled by differing voices among politicians over the draft Constitution, souring relations between partners in the ruling Grand Coalition as well as new corruption scandals in Government.

They argued increased political risks threatened to have Kenya’s sovereign credit rating being downgraded––meaning the country would find it difficult to raise capital from the international market including issuing of the sovereign bond, and will be required to pay higher interest rates for money it borrows from international market.