Foreign investors have shunned government bonds on anxieties arising from recent sovereign ratings downgrades, trimming the interest rates on Treasury bonds amid the sale of two re-opened infrastructure bonds (IFBs) this month.
Analysts said offshore investors foreigners have cut down their stake in the February infrastructure bond, which had registered heavy offshore interest—preempting subdued interest in the August tax-free bond whose auction closes on today.
“There is uncertainty as to whether foreign investors will be keen to purchase the IFBs in issue given recent developments in Kenya including ongoing government protests and the Moody’s downgrade of both the country’s sovereign rating and top three banks’ long-term deposits and issuer ratings.
Notably, foreign investors are factoring in these developments in their investment decisions as evidenced by the selloffs witnessed in July 2024 of the February IFB,” analysts at Sterling Capital observed in a fixed income note.
Offshore investors have expressed massive interest in the last infrastructure bond auction in February, supporting fresh foreign exchange inflows into the economy and anchoring a turnaround for the then-battered Kenya Shilling.
The offshore interest was partly stimulated by the government’s move to buy back part of its Eurobond notes maturing in June, which ended investor jitters on a potential sovereign default.
Despite the observed appetite for the infrastructure bond, holdings of the instruments by the non-residents remained modest at just Sh834 million at the end of March, according to data from the National Treasury’s third quarter economic and budget review.
The minimal holdings point to the likelihood of subsequent selloffs by offshore investors as evidenced by the IFB’s high turnover in secondary trading at the Nairobi Securities Exchange.
The bond has, however, sold at a premium driven by the appetites of other investors who had missed the opportunity to buy the paper at its primary auction in February.
IC Asset Managers economist Churchill Ogutu observes low trading volumes in the foreign exchange interbank market across July as evidence of the muted foreigners’ participation in the August IFB auction and subsequently sees no further support for the exchange rate from new offshore inflows.
“With volumes traded at the forex interbank at $282.3 million in the July 25 to-date period, coinciding with this month’s sale of the two re-opened infrastructure bonds, this does not suggest to us a possibility of a repeat of further Kenya shilling appreciation past current levels.
“Furthermore, sentiment has shifted negatively on the back of the Finance Bill 2024 withdrawal and subsequent downgrades by Moody’s and Fitch Ratings,” he said in a macroeconomic note published on August 9.
Central Bank of Kenya has been seeking to mobilise Sh50 billion from two re-opened IFBs with tenors of 5.8 years and 15.7 years, respectively.
The foreigners’ apathy of the auction is despite IFBs being the most preferred treasury bonds given their tax-free status and capital gains potential.
The auction is, however, widely expected to be oversubscribed, supported by local investors who include banks, pension funds, insurance firms, and retail clients.
“An oversubscription is expected largely on account of the high yield and tax exemption. We expect this oversubscription level to be moderate and mainly supported by local investors,” added analysts at Sterling Capital.
