Treasury overdraft cut signals State’s stable cash-flow outlook

The Treasury has substantially paid down the overdraft facility it holds at the Central Bank of Kenya (CBK) indicating the government did not foresee a shortage of cash in the second quarter of the fiscal year.

The latest domestic borrowing data from the CBK shows that the overdraft, which is a short-term financing option for the government, stood at just Sh500 million by the end of the second week of this month, having been paid down from Sh44.2 billion at the beginning of the financial year.

The CBK has not been short of offers for the short-term treasuries since the law capping loan rates (currently at 14 per cent) came into effect, as banks have been falling over themselves to tap the ‘risk free’ debt option.

Domestic borrowing analysis done by Kestrel Capital head of fixed income Alexander Muiruri shows the government is ahead of target for the fiscal year, having taken up a net of Sh53 billion against a target of Sh40 billion by September 16.

“The Treasury has opted to pay down its overdraft at the CBK, giving us the impression that they’re happy with their short-term liquidity projections. This implies long-dated tenors are intended to possibly roll over short-term debt, potentially allowing more aggressive bids a higher probability of success,” said Mr Muiruri.

This month the five- and 20-year bond offers that closed last week attracted a total of 1,505 bids worth Sh56.5 billion, with the State accepting Sh35 billion that was Sh10 billion above the initial targeted amount.

READ: Interest rates on T-bills down amid heavy bidding by banks

The accepted bids came in at interest rates of 13.1 and 14.6 per cent for the five and 20 year bonds respectively.

On the short term 91, 182 and 364-day securities, the government received total bids worth Sh27.1 billion against the offers of Sh16 billion, accepting Sh17.8 billion at rates of 7.9 per cent for the 91-day, 10.6 per cent for the 182-day and 10.6 per cent for the 364-day papers.

The government is in a position to reject highly priced bids even though there are heavy maturities of domestic debt worth Sh755 billion in the 2016/2017 fiscal year, which need to be rolled over.

The abundance of offers at falling interest rates also mean the government can ease up on the facility at the CBK, which attracts interest equivalent to the prevailing Central Bank Rate (CBR), currently at 10 per cent.

Short-term rates are likely to keep falling, according to fixed income analysts, who say the government still has the option of external borrowing if need be.

“The central bank has been actively rejecting aggressive bids on the papers recently issued, in a bid to keep interest rates low in the market…while rates have continued witnessing downward pressures, owing to the signing of the Banking Act (Amendment Bill) 2015” said Kingdom Securities senior analyst Mercyline Gatebi in a fixed-income note.

The Treasury had kept the overdraft borrowing above the Sh20 billion mark over most of the previous fiscal year, during which it came into cash flow problems.

The overdraft facility is repayable within 12 months from the date of borrowing, and is usually cleared by the end of every fiscal year, a requirement laid down in law.