Treasury raises local debt cap to escape global shocks

The Treasury has raised its domestic borrowing target to shield the economy from the turbulence associated with foreign debt – opening a new window for local investors to increase their earnings from risk-free government paper. (Also read: Fall in interest rates boosts Treasury’s borrowing plans )

The shift that will see the Treasury borrow up to 70 per cent of total public debt locally was part of the Finance Bill that Parliament passed last week.

“Taking into account both cost and risk considerations, the need to develop domestic debt markets and the feasibility of implementing the strategy in the medium term, the 2011 medium term debt strategy (MTDS) proposes a 70 per cent net domestic financing and 30 per cent external financing,” says the 36-page document signed by Finance minister Uhuru Kenyatta.

Kenya has in the past maintained a public debt policy that required an equal mix of domestic and external debt.

The Treasury is expected to use the new headroom to widen its presence in local bonds where investors have taken refuge in recent months following the decline of activity in the equities market.

Borrowing locally gives the Treasury room to raise cash with speed as need arises compared with external debt which takes long to negotiate and often comes with strict conditions.

Investors in the equities market have lost 20 per cent of the value of their wealth — amounting to Sh233 billion — since the beginning of the year, forcing many to take refuge in the fixed-income debt market where coupon rates have risen by large margins in the past three weeks.

Activity has also been rising in the fixed-income market at the Nairobi Stock Exchange (NSE) where investors traded bonds worth Sh72.2 billion in July compared to Sh19.9 billion in January.

Treasury says in its strategy that it intends to deepen the local bonds market as part of a wider plan to stabilise the cost of debt and strengthen Kenya’s position in dealing with external creditors who have been hardening their terms in response to uncertainty in global financial markets.

Mr Kenyatta said that a key pillar of the new strategy is to have sustainable debt levels with the implementation of the Constitution.
“As we embark on implementing the Constitution, it is important that the burden of public borrowing is equitably shared between the present and future generations,” he said.

Many analysts see the shift in favour of domestic debt as mainly driven by the ease of borrowing and less stringent terms that come with it.

“It comes with better terms than foreign donor terms and shields Treasury from exchange rate fluctuations that increase the cost of debt,” said Mr Robert Gatobo, a trader at the treasury department of Commercial Bank of Africa.

Exchange rate fluctuation has been a major drawback in the management of the national debt in recent months as the shilling suffered its worst beating against major world currencies raising the cost of external debt.

“The most recent cause of the rising external debt burden is the depreciation of the shilling against the hard currencies,” Mr Felistus Kivisi, assistant director at the debt management department of the Treasury, said.

And Mr Gatobo said that domestic debt was also a more reliable source of funds for government compared to external borrowing. “Reliability is going to be important because government can get the cash when it needs it,” he said.