Kenyan dollar bonds rose on Monday after the World Bank approved a $1 billion loan to support the East African nation’s economy, easing concerns about its ability to make payments on its foreign debt.

The yield on its note due in June of next year fell 124 basis points to 15.19%, the biggest decrease since November and down from as high as 21.38% earlier this month. The yield on its longest-maturity debt, due in 2048, fell to 11.55%.

“There was a lot of skepticism out there in the market earlier this year regarding Kenya’s external position, i.e. a relatively wide current account deficit, the upcoming $2 billion bullet payment in June 2024, and declining gross reserves,” said Gergely Urmossy, an emerging-markets strategist at Societe Generale in London. The new funding “should convince some of the skeptics that Kenya remains on a safe trajectory, and it will steer clear from a disorderly FX devaluation, and will be able to meet its eurobond obligations.”

The World Bank credit is being provided under its Development Policy Financing program, which seeks to enhance growth and improve governance. The debt adds to increased funding announced by the International Monetary Fund last week.

The loan will cover items including fiscal consolidation and improving agriculture productivity, Aghassi Mkrtchyan, a World Bank economist for Kenya, said at a virtual briefing on Tuesday.

Rising Rates

Kenya’s budget has been under pressure from shortfalls in revenue collection and challenging financing conditions brought about by rising global interest rates. The government is targeting narrowing its budget deficit to 4.1% of gross domestic product in the fiscal year that begins July 1, from an estimated 5.7% in the current year, driven by revenue-mobilization measures.

Kenya’s central bank forecasts the nation’s economy to expand 5.8% this year, compared with 4.8% in 2022. Growth has been largely driven by the public sector spending on infrastructure, resulting in increasing debt vulnerabilities: the nation spends more than half of its tax revenue on servicing debt.

It is the fifth time that Kenya is tapping the facility, bringing cumulative borrowing under the development policy program to $4.25 billion.

“We remain constructive on Kenya’s outlook,” said Societe Generale’s Urmossy. If the nominee to be the next central bank governor, Kamau Thugge, treforms the foreign-exchange market in a transparent way, “Kenyan assets could become even more interesting,” he said.

(Updates with bond moves from top.)