Kenyan investors are reluctant to lend billions to the government
Thursday 18 August 2022
Investors are unwilling to lend the government billions of shillings to secure higher interest rates, pointing to funding problems awaiting the new government.
Sales of government bonds in August fell Sh11.5 billion below target as investors demanded higher interest rates, forcing the Central Bank of Kenya (CBK) to keep bids on the table.
Bidders offered a total of Sh49.1 billion in the bond sale, which was targeting Sh50 billion, of which the CBK accepted Sh38.5 billion.
The three-tranche bond consisted of a three-year security, a 10-year offering and an additional 20-year facility.
Investors demanded an average of 12.45 percent from the three-year paper, but the CBK was willing to pay a yield of 11.8 percent.
They were asking 13.9 percent against the 12.3 percent fixed yield, while the 20-year bonds were asking 14.2 percent against a 13.4 percent coupon.
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The Kenyan money markets have also been characterized by a liquidity squeeze in recent weeks, analysts say.
Net borrowing from the offering was just Sh8.9 billion, once maturing bonds worth Sh29.6 billion are factored in, leaving the Treasury less than two months into the new fiscal year, which began on July 1st , sees a deficit in its borrowing target.
“Right now high global and local inflation is pushing investors to seek better real returns by aggressively bidding to offset rising inflation,” said Solomon Kariuki, analyst at AIB AXYS Africa, in a note on the bond.
Many countries are reporting multi-decade highs, including the US, where inflation hit 9.1 percent in June, the highest rate since 1981. It was flat in July.
In the US, inflation began to rise during the pandemic as government spending, including family checks, kept demand unusually high.
In many other parts of the world, such as Europe, the problem stems from more recent events, such as the war in Ukraine.
The International Monetary Fund expects inflation to reach 6.6 percent in developed countries and 9.5 percent in emerging and developing countries.
Kenya’s inflation climbed to a 61-month high of 8.3 percent in July, on the back of rising food and fuel prices and the cost of household appliances and appliances.
The new Finance Minister will have to raise a net Sh565 billion from the domestic market after the August 9 election to fund the Sh845 billion hole in this year’s budget.
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After a hard-fought race for the presidential election, Vice President William Ruto won 50.5 percent of the vote against opposition leader Raila Odinga’s 48.8 percent, according to results announced by Electoral Commission Chairman Wafula Chebukati. Mr Odinga dismissed the findings, signaling another row over the Supreme Court.
Rising national debt
if dr Ruto takes office he must steer a pandemic-ravaged economy, rising food and fuel prices triggered by the war in Ukraine, the worst drought in four decades, and a rising national debt.
“He faces some significant economic challenges, including the need to put Kenya’s public debt on a sustainable footing.
“On this front, investors could welcome a Ruto presidency, not least because he had discussed his preference for fiscal consolidation while his opponent had been open about the need for debt restructuring,” Capital Economics’ Virág Fórizs told the Financial Times.
The pro rata net borrowing target for the first two months of the year is therefore Sh94 billion, but the government has so far borrowed less than half that amount from bonds and treasury bills.
Since the fiscal year began on July 1, the Treasury has issued three bonds, all of which fell well short of raising their target amount.
The first, a tap sale of an infrastructure bond sold in June, raised 6.4 billion shillings from a target of 20 billion shillings.
The second was a two-tranche issue consisting of two 15-year papers that the State floated in mid-July to seek Sh40 billion, raising Sh9.3 billion, with the third being this month’s signed offering.
Analysts also pointed to tight cash market liquidity as a cause of the underperformance, as election-related uncertainty forced investors to hold cash in case of unforeseen shocks.
It’s also likely that the private sector will compete for funds from banks — the government’s largest lenders — after most of them got approval from the CBK for their risk-based pricing models for consumer loans, which should help them lend to more private borrowers.
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The CBK could therefore be forced to accept higher-priced bids if it wants to improve the performance rate of bond issues in the future.
Uncertainty about the economic policies to be implemented by the new government is also likely to trickle down into the bond market, with many likely to wait and see if there is a material shift in budgetary allocations from the new government once it takes office.
At the auction in August, investors largely opted for the shortest term of the three tranches and submitted bids worth Sh21.8 billion.
The 10-year and 20-year tranches had bids