Kenya’s treasury seeks cheaper loans, rejects ‘expensive’ bids

Kenya’s National Treasury’s plan to secure cheaper loans from commercial banks and pension funds has started playing out in the local money markets with central bank rejecting bids it considers “expensive.”

The EastAfrican has learnt that investors are demanding a compensation for the value of their money eroded by inflation, which is hovering at a record high of 9.5 percent as a result of high fuel and food prices.

Central Bank of Kenya (CBK), the government’s fiscal agent, is under pressure to borrow from the domestic market at a rate that is not more than 10 percent as President William Ruto’s administration seeks to bring the mounting debt burden under control. However, the performance of the treasury bond auction in the past three months shows that the government has been borrowing at an average rate of 13.82 percent, according to the latest CBK data. According to analysts at Cytonn Investments Ltd, the government continued to reject expensive bids, in the month of November accepting a total of Ksh129.3 billion ($1.05 billion) of the Ksh161 billion ($1.31 billion) worth of bids received, translating to an acceptance rate of 80.3 percent.

“However, yield on government securities increased during the month (November) compared with the same period last year (2021) as a result of the elevated inflationary pressures leading to investors demanding higher premium,” according to the analysts through the month market report for November dated December 4 2022.

“Despite the slight decline in inflation in the month of November to 9.5 percent from 9.6 percent in October, we expect the inflationary pressures to remain elevated in the short term, mainly on the back of high fuel prices.”

Government debt

Treasury bonds constitute 82.53 percent of government debt followed by treasury bills (15.44 percent), overdraft at central bank (1.3 percent) and other domestic debt (0.73 percent)

Commercial banks and pension funds are major investors in government securities controlling 47.45 percent and 32.77 percent of the government debt respectively.

In November bond turnover in the secondary market declined by 5.3 percent to Ksh54.5 billion from Ksh57.6 billion in October, signalling reduced activity by commercial banks.

Last month, average yields on the 91-day and 364-day Treasury Bills also increased by 13 basis points (bps) and 25.1 bps to 9.2 percent and 10.2 percent from 9.1 percent and 9.9 percent respectively in October.

The National Treasury faces a Ksh40 billion ($327.86 million) debt repayment demand after failing to convince ordinary bondholders to shift their Ksh87.8 billion ($719.67 million) investments into a long-term infrastructure bond.

Six-year bond issue

The results of the six-year bond issue No. IFB1/2022/006 dated December 5 2022 (Switch auction) shows that the government received bids totalling Ksh52.9 billion ($433.6 million) against a target of Ksh87.8 billion ($719.67 million), indicating a subscription rate of 60 percent. Of the Ksh52.9 billion ($433.6 million) bids received, the government only accepted Ksh49.11 billion ($402.54 million) comprising Ksh47.1 billion ($386.06 million) and Ksh2 billion ($16.39 million) worth of competitive and non-competitive bids respectively.

Analysts at Cytonn Investments partly attributed the under subscription of the switch bond to investors avoiding the duration risk and tightened liquidity in the money market.

The government only managed to save Ksh47.75 billion ($391.39 million) from the switch bond priced at 13.215 percent

Central Bank converted Ksh87.8 billion ($719.67 million) worth of treasury bills and bonds that were maturing on December 5 into a new six-year Infrastructure bond. The move was aimed at saving the government Ksh87.8 billion ($719.67 million) in interest and principle repayments to ease pressure on the government’s debt obligations.

Switch bond snubbed

However, investors snubbed the switch bond with the government only managing to raise Ksh47.75 billion ($391.39 million) out of the Ksh87.8 billion ($719.67 million) targeted amount, leaving the National Treasury with Ksh40 billion ($327.86 million) to pay off immediately escape default.

With the infrastructure bond the government was hoping for an interest payment relief of six months until June 5 2023

The idea of a bond switch is part of a plan by President William Ruto’s administration to manage escalating domestic interest rates.