Cost of debt to rise on shorter maturity profile

The average term of maturity of the government’s domestic debt has declined as the amount of short-term debt rose since the introduction of the interest rate caps, raising the chances of higher costs when refinancing.

According to a new report prepared by investment bank Sterling Capital, the changes in maturity and amount of short-term debt also poses danger to the sustainability of the debt. The implication is that instead of repaying the cash over a longer period, the State is being forced to repay it within shorter time periods.

The maturity period has declined to three years and 11 months as at the end of June compared to four years, nine months in December 2016.

The rate caps came into force in September of 2016, restricting the retail lending rate to four percentage points above the base rate and putting the floor on the deposits at 70 per cent of the same base rate.

“Average Term to Maturity (ATM) of domestic debt has been on the decline especially since interest rate caps were introduced as a result of investor preference for shorter dated securities,” said the investment bank.

“Government should be concerned about the declining ATM and the increasing proportion of short term to total domestic debt as it increases its exposure to re-financing risk and therefore is a threat to long-term debt sustainability,” the analysts added.

Short-term debt in the form of Treasury bill take-up as a proportion of total domestic debt has risen to 36.8 per cent from 26.5 per cent during the 18-month period to June, because most bidders – which are mostly commercial banks – have preferred to go for the instruments instead of long-term bonds.