(Bloomberg) -- Kenya is in talks for a $1.5 billion loan from Abu Dhabi to help bridge the East African nation’s budget-financing gap, according to people with knowledge of the plans.
The loan will carry an interest rate of about 8.2%, according to two of the people, who asked not to be identified as the discussions are private. That’s lower than prevailing yields for Kenya’s sovereign bonds. Finer details on the package are still in discussion and may change, the people said.
In comparison, the yield on Kenya’s 2031 eurobonds was down 31 basis points to 9.619% by close of trade Wednesday, and little changed from 9.75% coupon at issue in February.
It’s the latest in a series of bailouts Abu Dhabi has extended to African countries in recent years — including $35 billion to Egypt earlier this year — as it seeks to build influence on the continent.
Kenya, which is awaiting a long-delayed $600 million International Monetary Fund program disbursement, is in dire need of funds. The Treasury is walking a financing tightrope after deadly protests forced President William Ruto’s administration to abandon tax measures that would have collected $2.7 billion this year.
As a result, Kenya has widened its budget deficit to 4.3% of gross domestic product for the current fiscal year through June from an initial 3.3%, potentially breaching IMF-program targets. To fill that hole, it plans to take on about $2.8 billion foreign loans and borrow $3.2 billion locally.
Kenyan Treasury Secretary John Mbadi didn’t answer calls and text messages to his mobile phone. The United Arab Emirates’s foreign ministry didn’t respond to an emailed request for comment.
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The cash from the oil-rich emirate will boost Kenya’s foreign-currency reserves and further buttress the shilling, already one the world’s best-performing currencies against the dollar this year, according to data compiled by Bloomberg.
Gulf states including the UAE and Qatar have spent some of their petrodollars to deepen their influence in Africa while countering dominant powers such as the US, China and Russia.
While Kenya aims to diversify from expensive commercial borrowing, it may be locked out of those markets due to concerns about its capacity to repay. The IMF classifies its debt as being at high risk of distress and has helped the nation address that vulnerability with a $3.6 billion package.
The IMF declined to comment on Kenya’s discussions with specific bilateral creditors.
“As for our engagement with Kenyan authorities in the context of the ongoing program, discussions are ongoing on policies and reforms the authorities are considering to address the economic and fiscal challenges they face,” a spokesperson said.
All three major credit-rating companies have lowered the nation’s grade deeper into junk, which will likely increase borrowing costs.
Kenya requires about $1.5 billion annually to cover interest repayments alone and another $26 billion over the next decade for principal amounts, according to Treasury data.
Investors expressed relief earlier in the year when Kenya successfully rolled over part of a maturing $2 billion eurobond, albeit at a relatively expensive price.
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(Updates with IMF comment in 11th paragraph.)
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