January domestic borrowing down Sh10bn on bond maturities

Kenya’s net domestic borrowing for the current fiscal year dropped Sh10 billion in the first two weeks of this month to Sh83 billion due to heavy maturities, signalling further pressure on interest rates as the State plays catch up.

At the end of December, the net borrowing was Sh93.5 billion, according to a local borrowing scorecard prepared by Kestrel Capital. This is way behind its mid-year borrowing target of about Sh110 billion.

With a target of Sh221.5 billion in new domestic borrowing for the fiscal year ending June 2016, the Treasury is still to borrow Sh140.8 billion from the market, which is also likely to affect the economy through diverting credit away from the private sector.

The government’s need to accelerate borrowing at a time a lot of debt is maturing, and needs to be repaid, has been cited as the reason interest rates are expected to rise in the first quarter of this year.

There are maturities worth Sh85.9 billion due in January, Sh58.86 billion in February and Sh80.53 billion in March.

“The slowdown in private sector credit means that major banks will be looking to enhance their income streams through higher yields on their Treasuries portfolio. This makes it hard for the Treasury to meet its borrowing target while taming interest rate expectations,” said Kestrel Capital head of fixed income Alexander Muiruri.

“The options available include either enhancing the Treasury bond secondary market with more innovative instruments, implementing tax reforms, rationalising public expenditures or borrowing externally. All these should help close the fiscal budget deficit.”

This week’s auction of the Sh4 billion 91-day T-Bill saw the interest rate rise to 11.43 per cent from 11.38 per cent, with the Central Bank of Kenya (CBK) accepting Sh4.7 billion out of the bids of Sh7.7 billion.

On the 182 and 364-day T- bills the CBK accepted Sh17.21 billion out of Sh21.72 billion bids, having been in the market for Sh12 billion.

The interest rates rose to 13.71 per cent for the 182-day paper and 14.33 per cent for the one-year offer, each by 0.5 percentage points.

The acceptance of higher interest rates by the Treasury for the bills could be a sign that the government is now relenting on its reluctance to take up expensive money from the markets.

READ: Treasury behind borrowing targets on high finance costs

The government is targeting the high maturities for rollover, and is in the market for Sh35 billion through a two-year and a reopened 10-year bond which analysts say are likely to fetch yields of between 14.5 and 16 per cent.

According to Genghis capital fixed income analyst Vinita Kotedia, investors are most likely to pump money in the two-year bond, majority of the demand coming from investors rolling over the maturing five- year paper issued in 2011 worth Sh22.08 billion.

In the secondary market, investors are also looking to limit their exposure amid uncertainty on interest rates by opting for shorter-tenor bonds.

“Nonetheless, the Central Bank is likely to mitigate upward (rate) pressures by adopting a cautious monetary policy stance and prudent liquidity management,” said Ms Kotedia in an analysis.

Less than satisfactory revenue performance in the first quarter of the fiscal year is also likely to be a factor pushing the Treasury to accept expensive money as it finances the gaping Sh600 billion budget deficit.

KRA managed to raise Sh300 billion in tax revenue in the first quarter against a target of Sh328 billion, attributing the shortfall to factors beyond its control such as the delayed passage of the Excise Tax Bill by Parliament and inability to implement the capital gains tax.