The Central Bank of Kenya (CBK) has cautioned that the National Treasury may have to negotiate for refinancing of domestic debt, after maturity fell sharply to below five years from a high of 8.4 years in 2011.
This is contained in the latest Financial Sector Stability report prepared in conjunction with four other regulators—Capital Markets Authority, Insurance Regulatory Authority, Retirement Benefits Authority and Sacco Societies Regulatory Authority.
“Domestic debt maturities continue to shorten, posing potential rollover risks in the medium term if the trend is not reversed,” notes CBK.
This means that CBK sees increased possibility of government having to mitigate the impact of debt repayments by negotiating for a series of refinancing given that the current profile is below its own targets. Short average maturity implies high refinancing risk through pressure on interest rates and liquidity.
“The average time to maturity of all government securities reduced to 4.05 years in December 2017 and 4.5 years in December 2016. These are way below the maturity profile target of 70:30 (long term to short term) under the 2017 Medium Term Debt Strategy,” says the report.
Refinancing risk arises when the debt issuer is unable to successfully take in new debt at sustainable market rates to offset maturing debt. This may occur when there are competing instruments that offer better return, forcing higher rates to compensate for potential losses.
In 2010, average maturity of total debt was 8.9 years but this has been coming down over the years, potentially exacerbating Kenya’s debt sustainability situation.
According to CBK, by the end of December 2017, Treasury bonds to Treasury bills ratio was 65:35, down from 67:33 in December 2016 and 73:27 in December 2015.
As of end of December, total debt stood at Sh4.56 trillion but this has grown to 5.039 trillion by June 2018, according to latest CBK data. Domestic debt makes up 49.2 per cent of total debt.
As of end of September, Treasury bills (excluding repos) were at Sh867.51 billion, being 37.14 per cent of domestic debt while Treasury bonds were valued at Sh1.468 trillion or 62.86 per cent of total domestic debt.