Treasury seen raising local debt as tax slides

The government is likely to upwardly revise its domestic borrowing for the current fiscal year after surpassing its target in the first quarter amid a shortfall in revenue collection, analysts say.

The Treasury has a net domestic borrowing target of Sh306.8 billion for the year, coupled with internal debt redemptions (roll-overs) of Sh122.6 billion.

Analysts at investment bank Sterling Capital said in their November fixed-income report that an increase in the target—which has already been pushed up by Sh6.5 billion— would be aimed at countering the expected shortfall in revenues for the fiscal year or looking to take advantage of the prevailing low interest rate environment.

In a statement at the end of September on exchequer issues and receipts, the Treasury said it had borrowed a third of its total target in the first three months of the fiscal year.

“Sh144.1 billion was raised from the domestic debt market in the period under focus equivalent to 33.6 percent of the total target (above the 25 percent linear run rate). This supports our view of a high chance of a revision of this receipt target,” said the Sterling Capital analysts.

At the same time, tax revenue performance lagged the quarterly expectations by the end of September at Sh372.3 billion, equivalent to 20.6 percent of the full year target of Sh1.807 trillion.

During the rate cap era, the government was able to borrow relatively cheaply from the domestic market as yields fell due to banks turning to government securities after shunning customer lending.

The expectation is that the lenders will now push up customer loans where they can now load risk cost, crowding in the private sector.

Such a move would force the government to offer higher rates on its papers in order to compete for money, although the Sterling analysts say this rise in yields will only be gradual.