Central Bank of Kenya floats Ksh75bn infrastructure bond

The Central Bank of Kenya has announced the invitation for bids for a 75 billion shillings 21-year amortized infrastructure bond. This bond is aimed at funding infrastructure projects outlined in the 2021-2022 financial year budget estimates. To shed more light on this development, CNBC Africa spoke with Churchill Ogutu, the Head of Research at Genghis Capital. Ogutu discussed various aspects of the infrastructure bond, including the market's expectations for the coupon rate, potential over-subscription due to high liquidity in the market, and the uncertainty around the specific infrastructure projects that will benefit from the bond. The infrastructure bond is tax-exempt, making it attractive to investors, but concerns linger about the transparency in the use of funds given Kenya's history of questionable public spending. The bond's amortized feature means investors will receive 50% of their principal back after 10 years. Despite the risks, the infrastructure bond presents an opportunity for funding critical projects in Kenya's infrastructure sector. Ogutu highlighted that the coupon rate for the infrastructure bond will be market-determined, and it is still early to predict the exact rate due to the recent announcement and the prevailing market conditions. However, he noted a growing liquidity trend in the market, indicating a risk-on sentiment towards government securities. The previous infrastructure bond issued had a yield of 12.67% during the auction, which later reduced to 12% after four months. The tax-exempt status of infrastructure bonds makes them appealing to investors, leading to expectations of high subscription levels for the current bond. The purpose of the infrastructure bond is to fund priority projects such as hospitals, roads, ports, water and sanitation facilities, and energy projects. However, Ogutu mentioned the lack of specific details on the sectors that will benefit from the funds raised. While the infrastructure bond offers an avenue for financing crucial infrastructure developments, concerns arise about the transparency and accountability in fund utilization, given past issues with public spending in Kenya. Investors may perceive a risk in the misuse of funds raised through infrastructure bonds, similar to 'greenwashing' practices where the stated purpose of the bond may not align with the actual use of the proceeds. Ogutu emphasized the need for reforms to enhance transparency and ensure the proper allocation of funds to the intended infrastructure projects. The amortized feature of the bond means that investors will receive partial principal repayment after a certain period, reducing the overall duration of the investment compared to traditional fixed-term bonds. In conclusion, while the infrastructure bond presents an opportunity for investors to participate in funding essential infrastructure projects in Kenya, questions remain regarding fund utilization and accountability. As the country navigates these challenges, transparency reforms and clearer guidelines on project allocations will be crucial for instilling confidence in the integrity of infrastructure bond investments and ensuring their impact on Kenya's development agenda.