The Treasury’s ability to raise cash from commercial banks has shrunk following a pacey growth in the fiscal deficit and lenders’ slowing deposit accumulation.
Rating agency Moody’s in a new report said Kenyan banks are only seeing deposits at three percent of the Gross Domestic Product (GDP) while the fiscal deficit has typically exceeded seven percent in recent years – leaving a gap of four percentage points.
Kenya is grouped together with Angola, Ghana and Bahrain in terms of countries where government will have serious challenges raising more cash from banks because the deficits are already quite large amid slow growth in deposits relative to the size of the economy.
This is also in view of the fact that Kenyan banks already hold 30 percent of assets in government securities. The holdings have been rising as the institutions have reduced their focus on the private sector due to the restrictions on the movements in lending rates.
“In Kenya, new deposits worth around three percent of GDP per year are insufficient to finance fiscal deficits of around seven per cent of GDP. Like in Angola, government securities already account for around 30 percent of banking assets and gross borrowing requirements (GBR) is large relative to the banking system's size,” said Moody’s.
Lenders still have a preference for lending to the government whose fiscal deficits, on the other hand, are rising with Kenya’s now set to hit 6.3 percent by June 30 against an initial projection of 5.7 percent. They have practically avoided lending to the micro, small and medium enterprises (MSMEs), judging that the cap falls below the minimum risk-adjusted interest rate.
Moody’s says the willingness to finance government will continue to depend on the cap, with maintenance of the cap likely to favour the state in raising funds – even if the rising fiscal deficit may be increasingly difficult to close – as the private sector is crowded out.