Treasury signals more switch bonds in 2023


National Treasury and Economic planning CS Prof Njuguna Ndung’u on February 13, 2023. PHOTO | LUCY WANJIRU | NMG

The National Treasury has signalled the issuance of new switch bond auctions this year as part of its plan to manage debt by prolonging the maturity of outstanding domestic securities.

The exchequer plans to issue medium to long-term bonds to replace shorter-dated instruments such as Treasury bills as it faces record-high domestic maturities in 2023.

“The 2023 medium-term debt management strategy envisages maximisation of concessional and semi-concessional external debt while proposing liability management operations in the domestic and in the international capital markets,” the National Treasury said in its 2023 Medium Term Debt Management Strategy.

“The domestic funding components will be through medium to long-term bonds as the stock of Treasury Bills is reduced to lengthen the maturity structure and to reduce refinancing risk.”

According to the Central Bank of Kenya, the government’s fiscal agent, liability management operations are primarily bond switches and buying of securities.

Switch auctions usually roll over impending maturities into longer-dated instruments, thereby easing the debt servicing burden.

While switch auction bonds are yet to become a mainstay in Kenya’s debt management, the government has somewhat tested the market by issuing a switch auction in each of the last two years.

In November 2022 for instance, the CBK issued a Sh87.8 billion switch auction while locking initial bidders to holders of Treasury bills and bonds of the same maturities which were due on January 9.

The switch auction was successful at extending Sh47.8 billion in expected maturities with holders of a two-year bond accepting the bulk of the switch or Sh39 billion.

The National Treasury had previously deployed the debt management instrument in June 2020.

November’s switch bond auction was widely seen as a move to cushion the exchequer from a potential liquidity crisis at the start of 2023.

Future liability management operations are expected to involve Kenya’s entire Sh4.5 trillion domestic debt portfolio apart from Sh151.1 billion uncalled guaranteed debts, Sh58.5 billion government overdraft at CBK, Sh12.8 billion in suppliers’ credit and Sh13.9 billion bank advances.

Kenya faces its highest domestic maturities on record this year, largely on account of maturing short-term government securities which pauses heightened liquidity pressure on the exchequer to meet the repayments.

According to data from the National Treasury, domestic debt maturing in less than one year stood at $6.963 billion (Sh879.4 billion at current exchange rates) at the end of December last year and represented 19.5 percent of the total domestic debt portfolio in the period.

Further to the domestic liability management operations, the National Treasury is seeking to deepen the domestic debt market with the goal of bringing down the cost of domestic credit.

“The development of the domestic debt market is a precursor for accelerating the attainment of affordable, sustainable long-term financing for economic recovery,” the National Treasury stated.

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