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Slowing economy to spark rise in short-term interest rates

By Standard Reporter | November 23rd 2015
By Standard Reporter | November 23rd 2015

A decline in the country's short-term borrowing costs, which saw yields more than halve in the past month, is set to reverse as slowing growth puts pressure on Government finances, according to economists.

Rates on 91-day Treasury bills tumbled to 9.65 per cent at an auction on November 6, from 13.6 per cent a week earlier and as high as 22 per cent last month.

Faith Atiti, a research analyst at Commercial Bank of Africa Ltd, said those yields may rise in coming months as the Government borrows more in the domestic market to counter slowing tax revenue.

"With the shortfall in revenue, they will pick as much as they can from the domestic market," Atiti said. "How else will they fund the deficit?"

Kenyan Treasury Secretary Henry Rotich last week cut this year's economic growth forecast to as low as 5.8 per cent after a series of deadly militant attacks hurt Kenya's tourism industry, the country's second-biggest foreign-currency earner.

While visitor arrivals are now on the mend, agriculture, which accounts for about a quarter of gross domestic product, could struggle against an expected decline in rainfall caused by the El Nino weather phenomenon.

Supplementary Budget

The Government will probably raise its domestic-borrowing target by 20 per cent to a net Sh265 billion in a supplementary budget next year, according to Alexander Muiruri, head of fixed income at Kestrel Capital Ltd. That would see short-term interest rates climb as high as 16 per cent, he said.

"We may have over-corrected, rates came down too fast," Muiruri said by phone. "They will correct upwards to between 15 per cent and 16 per cent."

Yields on 182-day and 364-day securities eased to 10.2 per cent from 12.3 per cent, and 12.1 per cent from 13.6 per cent respectively at an auction this week.

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