Wealthy investors and financiers like banks and pension schemes are putting pressure on the Central Bank of Kenya (CBK) to increase the cost of government borrowing as global hikes in lending rates make local assets less attractive.
Investors are unwilling to lend the government billions of shillings in a push for higher interest rates, signalling a funding headache that awaits the new administration.
But the CBK has resisted efforts to push bond rates above the 14 percent mark, which will reward investors while making it costly for the Treasury to borrow amid risks of commercial bank lending rates could spike.
Since July this year, the CBK has borrowed Sh93.2 billion in bonds, which is 58.2 percent of the Sh160 billion sought by the government.
The CBK may have to accept higher-priced bids if it is to improve the performance rate of bond issuances going forward, analysts warn.
“Expectations of higher inflation coupled with the sovereign’s preference for local deficit financing continues to boost interest rate projections,” NCBA Group said in an economic update.
“The CBK has, however, remained keen on rejecting expensive bids in an effort to contain the upward adjustment in yields as well as anchor the government’s cost of borrowing.”
The CBK faces the challenge of keeping borrowing costs manageable for the new administration amid the reluctance to access foreign commercial loans due to their surging costs.
The Treasury recently abandoned plans to float at least $1 billion (Sh120 billion) Eurobond after interest demanded by investors doubled to about 12 percent from 6.3 percent a year earlier for a similar amount.
Kenya has in the past three financial years largely tapped cheaper concessional loans, helping slow down the accumulation of expensive short-term foreign commercial credit and loans from rich countries which largely come on semi-concessional terms.
The rise in global borrowing costs is highly unwelcome to developing countries, many of which are struggling to return to pre-pandemic economic output levels.
The costly borrowing costs are tied to the decision by a host of central banks from across the world to raise interest rates in a global fight against inflation that is sending shockwaves across financial markets and economies.
The US Federal Reserve set the pace on Wednesday with a 0.75 percent rate hike, its fifth since March, and a half dozen central banks from Indonesia to Norway followed suit with rises of similar or identical size within hours.
Low returns in the Kenyan market means investors are seeking better returns in foreign markets that have recently become more attractive as global rates increase.
Investors have demanded over 14 percent for three long-dated bonds, but the CBK only accepted 13.9 percent on a 15-year bond, 13.9 percent on a 20-year bond and 13.8 percent on another 15-year bond.
Since the beginning of the fiscal year on July 1, the Treasury has floated four bonds in nine tranches, most of which have fallen significantly short of raising their target amounts.
This has led the CBK, which acts as the government fiscal agent, to reject bids worth Sh66.8 billion since July.
This may impact the government’s target of raising Sh565 billion from the domestic market to plug the Sh845 billion hole in the national budget for the year ending June 2023.
The rate hikes also tend to spark dollar outflows to safe havens in the developed world that ultimately depress the value of the local currency.
In Kenya, the shilling has weakened 6.1 percent to 120.1 units against the dollar since the start of the year, compared to a 0.5 percent depreciation in a similar period in 2021.
Genghis Capital Economist George Bodo says an investor will need outsized returns on Kenyan currency-denominated assets to compete with the rates offered in the developed markets.
"To achieve stickiness in capital flows and counterbalance rate rises in the US and Europe, emerging markets must now premiumise returns on domestic assets," Mr Bodo said.
Expensive borrowing will hurt President William Ruto administration’s that is battling the effects of the soaring public debt.
Besides debt, Dr Ruto will also have to steer a pandemic-battered economy, rising food and fuel prices spurred by the war in Ukraine, and the worst drought in four decades.
The new President in his maiden United Nation’s address signalled his preference for debt restructuring that had been proposed by his Azimio coalition rivals when he asked the multilateral lenders and Paris Club of rich countries to reschedule developing world debt.
"The World Bank, the IMF and other lenders must extend pandemic-related debt relief to the worst-hit countries, especially those affected by the devastating combination of conflict, climate change and Covid-19," he said.
"The G20 must also suspend or reschedule debt repayments by middle-income countries during the pandemic recovery period."