Kenya Dollar Bonds Deepen Losses as Ruto Abandons Tax Plans

Colleen Goko and Eric Ombok
·3-min read

(Bloomberg) -- Kenya’s sovereign dollar bonds extended losses after anti-government protests forced President William Ruto to scrap a $2.3 billion plan to balance the budget and make the country’s debt sustainable.

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The nation’s 2031 debt security fell to its lowest price since being issued in February, pushing Kenyan bonds as a group to one of the worst performances among emerging and frontier markets since June 18, when demonstrations began. At least 17 people were killed and dozens injured in the protests.

Kenya — like several other developing nations — faces an urgent need to carry out fiscal reforms as it seeks to cut elevated debt levels, contain soaring interest costs and secure funding from the International Monetary Fund. But people signaled little tolerance for further pain after post-Covid inflation spikes left them trapped in a cost-of-living crisis. Lawmakers initially gave up the most contentious proposals, including a 16% levy on bread, but the protesters continued to demand the whole plan be scrapped.

That’s what Ruto did on Wednesday, via a television address.

“I concede,” the president said. “I will not sign this Finance Bill, 2024. I run a government but I also lead people. And the people have spoken.”

Kenya Scraps $2.3 Billion Tax Plan After Deadly Protests (1)

EM countries are still dealing with the repercussions from Russia’s invasion of Ukraine, especially the negative spillover effects into higher global energy and food prices and the resulting rise in interest rates, said Simon Quijano-Evans, chief economist at Gemcorp Capital Management in a note to clients.

Sub-Saharan Africa had been one of the harder hit due to the substantial weight of food in their respective CPI baskets and the increasing exposure to hard currency debt. After abandoning his fiscal plan, Ruto has few options as he looks to rein in a budget deficit running at 3.3% and an interest burden that takes away a third of government revenue.

“Combined with a very young and dynamic population that is facing economic challenges on all fronts, all this is clearly a huge burden for African society, as seen in the reactions to Kenya’s finance bill,” said Quijano-Evans.

The East African nation’s securities have handed investors a negative 1.3% since June 18 through June 25, the biggest losses after Gabon and Egypt in a Bloomberg Index of developing-nation sovereign dollar bonds. The EM average was a positive return of 0.3% in that time.

The protests began after Ruto pushed for taxes on everything from motor vehicles to mobile-money transfers to help stabilize the state’s finances. Kenya agreed an economic plan with the IMF in 2021 that commits the government to reducing the budget deficit, boosting revenue collection and curbing wasteful spending.

Concerns about Kenya’s long-term solvency are growing, Hasnain Malik, a strategist at Tellimer, wrote in a note dated June 21. Although the nation’s short-term external liquidity issues had been mostly resolved, its latest fiscal performance has been disappointing, he said.

“Additionally, there is significant opposition to the ambitious budget,” he wrote. “This underscores the challenges Kenya faces in making its debt sustainable.”

Last year, Ruto faced similar protests that left more than 50 people dead, but those didn’t have the nationwide reach seen in the latest marches. In the past, his biggest foe was opposition chief Raila Odinga, but this time around, it was the young Kenyans who have earlier been apolitical.

“Kenya needs to raise the revenue - one way of the other - and reforms are always painful in the short run,” said Soeren Moerch, portfolio manager at Danske Bank.

--With assistance from Maria Elena Vizcaino and Helen Nyambura.

(Updates with Ruto scrapping tax plan, minor edits throughout)

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