RenCap casts doubt on timing of sovereign bond issue

International investment bank, Renaissance Capital, has cast doubt on the Treasury’s plan to float a sovereign bond this year, arguing that the volatile shilling and weakening economic growth could make a foreign currency denominated loan expensive for the government.

In a preview note for the 2012-2013 national budget, RenCap economic analysts say that borrowing at a time when the shilling is unstable could make re-payment of the sovereign bond difficult.

“The foreign financing option may not be as attractive for the Kenyan government given the weak shilling, which we think would put upward pressure on Kenya’s foreign debt service cost,” says Renaissance Capital.

The report adds that the current double-digit rate of inflation and the high interest rates have also soured the option for issuing a sovereign bond.

This narrows the government’s options for financing the national budget, which is set to rise to Sh1.5 trillion in the coming financial year from Sh1.2 trillion in the current.

While announcing receipt of a Sh52 billion ($600 million) syndicated loan recently, Finance minister Njeru Githae said the Treasury was planning to borrow money through a sovereign bond to settle all or part of the two-year debt which was sourced from international banks.

Mr Githae said on Tuesday that the Treasury had opted to take a syndicated loan as a stop-gap measure to give it time to plan on the floating of the bond, which takes a longer time to conclude. “

Future plans

Our plan is to retire the loan on or before its term of two years through issuance of a sovereign bond,” said Mr Githae mid last month.
The forthcoming General Election and the new governance structures to be set up under the Constitution have contributed to increased budgetary needs. Revenues in the form of taxes are, however, not enough to fill the gap.

Statistics in the Third Quarter Economic and Budgetary Review indicate that the cumulative revenue collection as at the end of March amounted to Sh504 billion against the target of Sh552.5 billion, representing a shortfall of Sh47.7 billion.

To fill the shortfall the government will be mainly forced to borrow from the local market, RenCap says.

Increased borrowing is likely to keep interest rates high impacting negatively on economic growth.

“High yields would be negative for the equity market, as it would draw investors towards local debt, and for the private sector, as high yields would reduce commercial banks’ incentive to increase lending,” says RenCap.

Nelson Wawire, a lecturer at Kenyatta University’s macroeconomics department, however said the option to fill the financing gap through issuing a sovereign bond should not be ruled out.

Mr Wawire said the risk that the shilling could weaken further and make it more expensive to service debt is worth taking as options have become scarcer and adverse effects that would come from borrowing from the local market are worse.

“If the government borrows from the domestic market we will have more problems than we already have,” said Mr Wawire.

He added that the shilling’s volatility is greatly influenced by external shocks such as oil prices and the eurozone debt crisis which Treasury officials have no control over and in the long-run, long-term debt is more affordable to service.

The General Election has also thrown a spanner in the Treasury’s budgeting plans.

The election is normally associated with a slowdown of the vital tourism sector whose foreign currency inflows help to shore up the shilling.

The government has already tested international borrowing markets through the $600 million syndicated loan, out of which it has already drawn $240 million.