By Kepha Muiruri, NAIROBI
KenyaPresident William Ruto
Kenya investors are unwilling to lend the government billions of shillings in a push for higher interest rates amid a cash squeeze that has seen the State delay payment of civil service salaries.
Only one in four Treasury
bonds offered this year have met their target, with the latest issue raising a
measly Sh3.57 billion against a target of Sh20 billion, reflecting a
performance of 17.85 percent.
Investors are forecasting
higher rates in the wake of the cash crunch, forcing many to withhold investing
in longer securities such as bonds in the hope that the rising returns have not
peaked.
Instead, they have preferred
to pack their money in the shorter 91-day Treasury bill, which has been
oversubscribed by up to 643 percent, as they adopt a wait-and-see attitude over
the trend of returns in the bond market.
Interest rates on bonds have
ranged from 12.9 percent and 14.4 percent this year compared to returns of
between 11.2 percent and 13.9 percent in the same period last year.
The 91-day T-bill hit double
digits for the first time since February 2016 at 10.004 percent, from an
average of 7.8 percent in June last year.
It posted a 643.29 percent
performance rate last week as investors bid some Sh25.731 billion against just
Sh4 billion on offer.
The apathy in the bond market
has worsened the State’s cash squeeze caused by massive interest payments for
Kenya’s mounting public debt.
President William Ruto won a
hotly contested election last August having campaigned on a platform of lifting
millions out of poverty, but he is facing challenges from the high cost of
living and growing debt repayments.
“We are in a rising interest
rate environment and as such, many would want to hedge against duration risks
and hence the low subscriptions seen on Treasury bonds,” analysts at Sterling
Capital said.
The analysts also linked the
undersubscription to investors seeking returns above the sky-high inflation and
the knowledge that the State could up its appetite to raise cash from the
domestic market, bumping returns from Treasury bonds.
Treasury data for the eight
months to February reveal the impact of depressed domestic borrowing on State
spending and the resulting cash crunch.
Domestic borrowing inclusive
of debt rollovers plunged by 47.2 percent in the eight months to Sh333.3
billion compared to Sh631.1 billion raised in the same period a year earlier.
Churchill Ogutu, an economist
at IC Asset Managers, said government spending will be depressed in the absence
of further budget cuts as the trajectory of domestic borrowing remains lean for
the remainder of the fiscal year.
“Reduced domestic borrowing
will constrain fiscal operations in the absence of a second supplementary
budget that brings down the budget expenditure to a more sustainable level. It
will be a tough balancing act in the remainder of the fiscal year,” he noted.
Total revenues over the
eight-month period trailed last year’s tally by some Sh27 billion or 1.45 as
improved tax and higher foreign borrowing offset the decline from domestic
borrowing.
MPs had not received their
March salary by April 7, a delay from the usual payment time of before March
26-30. But a section of lawmakers said the salaries were sent to bank
accounts Tuesday morning.
David Ndii, President Ruto’s
economic adviser, attributed the delays to the liquidity challenges posed by
the rising debt repayments.
Annual interest payments on
the domestic debt alone have surged to Sh680 billion this year from Sh180
billion nearly a decade ago when the debt binge started, Dr Ndii said, heaping
pressure on the government’s cash flow.
Treasury data show spending on
debt repayments stood at Sh694 billion in the eight months to February compared
to Sh667.2 billion in the same period a year earlier, reflecting a 4.0 percent
rise.
Dr Ndii said Kenya will not
default on its debt repayment obligations despite the cash crunch.
The debt burden, compounded by
a weakening local currency and international market turmoil precipitated by a
banking crisis, has caused some market participants to speculate that Kenya
could soon default like Zambia and Ghana.
Nairobi has no plans to go
down that route, Dr Ndii said.
“We are not insolvent. We can
finance repayments. It is a significant sacrifice but we are actually able to
pay,” Dr Ndii told Citizen TV on Monday night.
He said default was a “very
bad idea” since it would force the government to “spend the next three to four
years in very protracted debt restructuring negotiations.”
Rising inflation is forcing
investors to put pressure on the State in search of better real returns.
Kenya’s inflation remained unchanged at 9.2 percent in March on soaring food
and fuel prices.
Inflation has remained outside
the preferred government range of 2.5-7.5 percent since June last year.
The International Monetary
Fund Tuesday said Kenya’s average inflation this year will stand at 7.8
percent. - BusinessDaily
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