The Treasury’s borrowing struggles in the domestic debt market have continued after it raised less than half of the Sh40 billion it was targeting in the October bond sale.
The underperformance once again highlighted the disconnect between the demands by investors for higher interest rates and the Central Bank of Kenya’s (CBK) stance of keeping the cost of government borrowing below the 14 percent level.
External investors are also increasingly preferring the higher interest rates on offer in larger economies such as the US and the UK, which are less risky compared to counties like Kenya.
As the shilling continues to depreciate against major world currencies, traders in treasuries have been pushing for higher rates to cushion their returns from exchange losses.
Investors bid Sh18.8 billion in the October offer, which comprised reopenings of a 10-year paper first sold in 2017 and a 15-year paper first sold in 2020. The CBK took up Sh15.1 billion.
The bond buyers had demanded an average of 13.51 percent for the 10-year paper, with CBK accepting bids at an average of 13.37 percent. On the 15-year, the average rate demand was 14.14 percent, against n accepted rate of 13.97 percent.
The market average is largely influenced by the bids from the big investors including banks, pension funds, and insurers who state the interest they want to be paid while most small investors typically settle for the market average.
Analysts said that in addition to the apathy due to low interest rates on the papers, the sale also met headwinds from reduced liquidity in the market, largely due to reduced government payments and end of quarter tax remittances by banks.
“This was due to a combination of tight market liquidity which the CBK has been trying to address via reverse repos and expectations of rising interest rates which dissuades investors from holding medium to long-term bonds,” said analysts at city based investment bank Sterling Capital.
“Investors bid aggressively beyond the 14 percent psychological level, particularly on the 15-year tranche. These bids were, however, largely rejected by the CBK which maintained interest rates below this level.”
The underperformance, therefore, deepens the government’s budget financing difficulties, which have seen the Treasury raise a net of Sh108.7 billion from the domestic market since July, against a pro-rated target of Sh192.9 billion.
In the current fiscal year, the government is targeting Sh578.6 billion from the domestic debt market, as part of the financing of a Sh845 billion budget hole.
External borrowing has also proven difficult for the State, due to elevated rate demands for Eurobonds and syndicated loans by investors who are now getting higher returns from safe haven western markets.
In response to the borrowing difficulties and mounting debt servicing costs, President William Ruto last week ordered ministries to cut the current year’s recurrent expenditure by at least Sh300 billion.
The proposed cuts are likely to start with less essential expenditure on items such as domestic and foreign travel, expensive luxurious cars for top government officials, entertainment, training and publicity.