Debt dilemma as investors shun State bond sales

Businesswoman climbing a diagram while carrying a boulder with Debt word on her back
Kenya is facing a local debt crisis as investors gobble up short-term Government papers at the expense of long-term bets.

As part of a new debt management strategy, the National Treasury has in recent months turned to the domestic market instead of borrowing externally to finance the budget deficit in as it juggles its debts.

Sterling Research, in its latest review, indicates that as at June last year, more than a third of the Sh2.4 trillion domestic debt was placed in Treasury bills (T-bills) that were to mature within a year.

The average maturity period for the country’s whole domestic debt burden has reduced to four years, putting immense pressure on the National Treasury. This could explain why Treasury decided to hire 20 experts to provide guidance on determining borrowing ceilings for national and county governments.

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“According to the Medium Term Debt Management Strategy (MTDMS) 2018/19 - 2021/22, the Government aims to lengthen the maturity of domestic debt by reducing the share of T-bills in total domestic debt from 35 per cent in June 2017 to 13 per cent by 2021/22,” said Sterling Capital.

The biggest risk is that the Government intends to roll over and amortise Sh470 billion this year to avoid borrowing more than Sh1 trillion as several debts, including the Eurobonds, mature at a time when rates are likely to go up with the anticipated rate cap removal.

An amortised bond is where the debt is paid down regularly along with its interest expense over the life of the bond instead of waiting for the redemption of the whole principal amount at the end of the tenure.

This would mean that Treasury Cabinet Secretary Henry Rotich may need to incur expensive debt as he competes with the private sector for banks’ money, setting the stage for debt escalation.

According to rating agency Moodys, removal of the rate cap may result in more expensive debt for the Government if it continues to miss tax targets and increase appetite for local loans.

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Treasury bills are offered in three, six and one-year maturities, which explains why they are gaining popularity with investors as opposed to Government-issued bonds that span 25 years.

The Central Bank of Kenya (CBK) has taken advantage of the comparatively lower yields by issuing longer-dated debt securities, as was the case in February and July 2018 (20 years) and June 2018 (25 years).

However, these issues were significantly undersubscribed, with investors preferring to invest in T-bills, a scenario Sterling Capital attributed to investors’ expectations of a repeal of the law capping interest rates or an upward adjustment in the third or fourth quarter of the 2018/19 financial year that would likely result in an increase in yields.

Investors, probably realising Treasury is on the back foot, have forced CBK to sell a 10-year Treasury bond worth up to Sh40 billion at an auction this Wednesday.

Analysts say the investors are just insuring themselves from mark-to-market losses while waiting for direction on the rate cap and are, therefore, unwilling to currently commit money for long periods.

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Less risky treasuries

“Fund managers are looking for short-term bonds and T-bills while they wait for direction on the rates. It would only make sense if the Central Bank of Kenya came up with five to 10-year bonds or give a 15-year amortised bond just to make it attractive if it is trying to balance short and long-term maturities,” an analyst who requested anonymity said.

The rating firm said banks would just take advantage of the absence of the cap and charge Treasury a premium to make more money from the less risky treasuries rather than give to the private sector.

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