Capital Markets

Rate caps removal seen putting upward pressure on State debt yield

Henry Rotich
Treasury Cabinet Secretary Henry Rotich. FILE PHOTO | NMG 

Kenya’s domestic debt refinancing costs are likely to rise if the rate caps law is amended or scrapped, a UK-based accountant’s body has said.

The Institute of Chartered Accountants in England and Wales (ICAEW) in its latest report has said domestic borrowing costs have been contained but the attractiveness of government debt on a risk-weighted basis has risen.

“Now, however, there are expectations that the regulation will be amended or scrapped at the commencement of the new fiscal year in July, so domestic debt refinancing costs will become an increasing concern going forward,” said ICAEW in a report, Economic Insight: Africa Q2 2018, released on Tuesday.

Rate caps led to risk aversion as investors opted to invest in government securities regardless of the maturities offering the Treasury a chance to keep yields low.

Domestic borrowing has hit Sh300.4 billion against Sh293.8 billion target in the current financial year ending June 30.

The report, commissioned by ICAEW and produced by partner and forecaster Oxford Economics indicates that Kenya’s public debt has increasingly taken the form of commercial loans even as the government issued the country’s second Eurobond early this year.

It said the affordability of external loans will be determined by the yield demand by investors, which in turn will be defined by perceptions of whether Kenya is able to keep its fiscal house in order.
Public debt is now at about Sh5 trillion.

The report tipped agricultural, industrial and services sectors to record a stronger growth this year than in 2017. This is due to more favourable weather, stronger public investment and an improvement in business sentiment.

Real GDP growth is projected to reach 5.7 per cent before averaging just under six per cent per annum over the medium term.

“Kenya’s projected GDP growth points to solid economic recovery by the country’s key sectors.

The government need to build resilience across key sectors to maintain this positive momentum,” said Michael Armstrong, regional director, ICAEW Middle East, Africa and South Asia.