Investors are unwilling to lend the government billions of shillings in a push for higher interest rates, signalling a funding headache that awaits the incoming administration.
The August Treasury bond sale fell Sh11.5 billion below target as investors demanded higher rates that forced the Central Bank of Kenya (CBK) to leave bids on the table.
Bidders offered a total of Sh49.1 billion in the bond sale that targeted Sh50 billion, out of which the CBK accepted Sh38.5 billion.
The three-tranche bond consisted of three-year security, a 10-year offer and another facility of 20 years.
Investors demanded on average 12.45 percent from the three-year paper, but the CBK was willing to pay a return of 11.8 percent.
They demanded 13.9 percent against the set return of 12.3 percent, while on the 20-year they sought 14.2 percent versus a coupon of 13.4 percent.
Kenyan money markets have also been marked by a liquidity squeeze over the past few weeks, analysts say.
The net borrowing from the offer amounted to just Sh8.9 billion once maturing bonds worth Sh29.6 billion are factored in, leaving the Treasury looking at a deficit on its borrowing target less than two months into the new financial year that started July 1.
“The current high global and local inflation are pushing investors to seek better real returns by placing aggressive bids as compensation for the rising inflation,” said AIB AXYS Africa analyst Solomon Kariuki in a note on the bond.
Many countries are reporting multi-decade highs, including the US where inflation hit 9.1 percent in June, the fastest rate since 1981. It remained unchanged in July.
In the US, the rise in inflation started during the pandemic, as government spending, including cheques for families, kept demand unusually high.
In many other parts of the world, such as Europe, the problem stems from more recent issues, like the war in Ukraine.
The International Monetary Fund expects inflation to reach 6.6 percent in advanced economies and 9.5 percent in emerging markets and developing economies.
Kenya’s inflation climbed to a 61-month high of 8.3 percent in July on soaring food and fuel prices as well as the cost of home equipment and appliances.
The incoming Treasury Cabinet Secretary following the August 9 polls needs to raise a net of Sh565 billion from the domestic market towards financing the Sh845 billion hole in this year’s budget.
After a fiercely fought presidential election race, Deputy President William Ruto won 50.5 per cent of the vote against opposition leader Raila Odinga’s 48.8 percent, according to results declared by the electoral commission’s chairman, Wafula Chebukati. Mr Odinga rejected the results, signalling another Supreme Court battle.
Soaring public debt
If Dr Ruto takes office, he will have to steer a pandemic-battered economy, rising food and fuel prices spurred by the war in Ukraine, the worst drought in four decades and soaring public debt.
“He faces some significant economic challenges, including the need to put Kenya’s public debt on a sustainable footing.
“On this front, investors may welcome a Ruto presidency not least because he had discussed his preference for fiscal consolidation, whereas his opponent had openly talked about the need for a debt restructuring,” Virág Fórizs at Capital Economics told the Financial Times.
The pro-rata net borrowing target for the first two months of the year is, therefore, Sh94 billion, but the government has so far raised less than half of this amount from bonds and Treasury bills.
Since the beginning of the fiscal year on July 1, the Treasury has floated three bonds, all of which have fallen significantly short of raising their target amounts.
The first, a tap sale of an infrastructure bond sold in June, raised Sh6.4 billion out of a target of Sh20 billion.
The second was a dual-tranche issuance consisting of two 15-year papers that the State floated in mid-July seeking Sh40 billion, which raised Sh9.3 billion, with the third being this month’s undersubscribed offer.
Analysts also pointed at tight liquidity in the money market as a cause of the sub-par performance, with the uncertainty around the elections forcing investors to keep cash in case of unforeseen shocks.
There is also likely to be competition from the private sector for funds from banks—the biggest lender to the government—now that most of them have received approval from the CBK for their risk-based pricing models for customer loans, which should help them lend to more private sector borrowers.
The CBK may therefore be forced to take up higher-priced bids if it is to improve the performance rate of bond issuances going forward.
Uncertainty over the economic policy to be implemented by the incoming administration is also likely to filter through to the bonds market, with many likely to opt to wait and see if there is any substantial shift in budgetary allocations by the new government once it takes over.
In the August sale, therefore, investors largely pumped for the shortest-tenured of the three tranches, putting in bids worth Sh21.8 billion.
The 10-year and 20-year tranches had bids