The rising amount of maturing Treasury bonds are bound to worsen the country’s debt situation and may call for rollovers or refinancing. FILE PHOTO | NMG
Shorter tenure means the Treasury will have to honour payment obligations more often thus the strain.
Rising maturity risk on outstanding Treasury bonds over the last 12 years could potentially exacerbate Kenya’s debt sustainability situation. What is maturity risk? Allow me to illustrate first. At the close of 2006, Sh118 billion worth of outstanding Treasury bonds were due in nine years’ time. Sounds manageable.
At the close of 2009, Sh112.6 billion worth of outstanding Treasury bonds were due in 6.2 years’ time. Sounds manageable, still. By the close of 2017, Sh1.4 trillion worth of outstanding Treasury bonds were due in 5.7 years’ time. Still sounds manageable? Not at all.
The amounts—which include reissuances and tap sales—withstanding, notice how the time-to-maturity (TTM) narrows. There is definitely a debt congestion in the offing-and with it comes the risk that the Treasury might struggle to meet the outstanding debt obligations. And might be forced, in extreme cases, to resort to such measures as debt rollovers or even refinancing.
But how did we get here? First, the Treasury’s debt planners haven’t been quite spot-on with maturity management, especially over the last four years.
Currently, Treasury bonds maturity bracket ranges from one year to 30 years. Between 2006 and 2011, the average time-to-maturity of Treasury Bonds issued by the close of each year (December 31), excluding reissuances, stood at above eight years.
This later fell to below eight years at the close of 2012 after Treasury shortened the maturity of its bond issuances during the year to an average of 5.7 years.
In a bid to lengthen the maturity profile, the Treasury would issue bonds with average time-to-maturity of 10.5 years in 2013, stretching the maturity profile to above eight years. However, between 2014 and 2017 the average time-to-maturity of issuances narrowed to just 5.7 years implying that, during the three year period, the Treasury narrowed the tenure of its issuances.
Second, our yield curve management hasn’t been the best. There has been several occasions where the yield curve is inverted (or nearly inverted). The problem with the inversion is that it incentivises the shorter end of the curve, which encourages accumulation of shorter-tenured debt.
A yield curve, also sometimes referred to as the term structure of interest rates, is a graphical plotting of yields of similar credit-quality bonds (in this case Kenya Government bonds) against their maturities.
In a normal yield curve, holders of longer term debt get higher rewards than holders of short-term debt. However, in a situation of inversion, the reverse occurs. Why does it matter anyway? Treasury bonds form the bulk of domestic debt portfolio.
Indeed, at the close of 2017, bonds accounted for 66 per cent of total outstanding government domestic debt, designating them as being representative of debt sustainability trends.
Further, I want to add a different thrust to the body of debate on Kenya’s debt sustainability.
One of the biggest problems with Sh1.4 trillion worth of outstanding Treasury bonds maturing in 5.7 years’ time gravitates around elevation of the country’s debt-to-service ratio.
In the first five months of the current fiscal year (July-November), data from Treasury shows that slightly over a third of total revenues went into debt service.
On Wednesday, the Business Daily, citing Treasury’s revised expenditure plan for the current fiscal year, said that the Treasury will appropriate 45 per cent of ordinary revenues towards debt service in the second half of the fiscal year (January-June).
That is quite steep by any standards—and such levels submerge development expenditures, which tends to have long-term negative implications on the economy.
Going back to my theme, as part of measures to soften maturity risks on outstanding Treasury bonds, debt planners at the Treasury will need to consider issuing more longer-tenured Treasury bonds this year. Additionally, active yield curve management will be required in a bid to disincentivise accumulation at the short-end of the curve.
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