Capital Markets

WB says NSE bond market cause of high interest rates

brokers

Stockbrokers at Nairobi Securities Exchange. FILE PHOTO | NMG

The World Bank says Kenya spends three times more to service domestic debt compared to external debt due to lack of transparency in the Nairobi Securities Exchange (NSE) secondary bond market.

The Washington-headquartered institution says in the Kenya Economic Update themed “In Search of Fiscal Space,” that low transparency and accountability has kept away many foreign investors.

As of June 2018, the total debt stock had risen to Sh5 trillion with the split between external and domestic debt in the total debt stock at 51:49. But domestic debt attracted higher costs.

“Reflecting higher domestic interest rates, debt servicing charges on the domestic debt stock is about three time higher than from the external debt stock,” says World Bank.

It adds that Kenya attracts far fewer foreign investors into its local currency bond market relative to Nigeria, Egypt, Ghana and South Africa, even though it has grown very rapidly.

“Kenya needs a more well- developed secondary market. At the moment it is trying but there is need for more transparency and visibility if it is to win the confidence of foreign investors,” World Bank senior country economist Peter Chacha said.

Allen Dennis, also a senior economist at the World Bank, added that the market has not been sufficiently developed to match standards that would allow foreigners to participate through means such as electronic trading.

The report says that a fully developed bond market could boost availability of low cost debt refinancing given that Kenya needs to improve debt management by rebalancing the mix of expensive and shorter maturity commercial loans.

“Developing the local currency bond market could spur significant interest from foreign investors and potentially reduce country borrowing costs, extend the maturity profiles of local currency bonds, and reduce exposure to foreign exchange risk,” according to the World Bank.