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Treasury tests market with Sh25 billion long-term bond

By Kagure Gacheche | February 20th 2016

The National Treasury has returned to borrowing long-term from the domestic financial markets in a stamp of confidence that interest rates may have finally stabilised.

The last time the State borrowed long-term was in July last year, just before a spike in interest rates ravaged the financing plans of the Government and consumers.

In the current bond issue, the State seeks to borrow Sh25 billion from the public, following a major correction in the cost of credit.

“The Government could be looking to gauge market conditions by re-opening these longer-dated bonds to confirm if the ongoing interest rates reduction on short-term borrowings is sustainable long term,” said Eric Musau, an analyst at Standard Investment Bank.

He added that the debt issue would also indicate investor appetite for long-term bonds, which would help inform the Government’s fund-raising strategy going forward.

The key lending rate, commonly referred to as the 91-day rate, has dropped below 10 per cent after a volatile year.

A spike in interest rates mid last year put off the issuance of long-term debts, with the focus turning to expensive Treasury Bills, which are repayable within a year.

The Central Bank of Kenya (CBK) is giving Kenyans up until next week Tuesday to invest in five and 10-year Treasury bonds at interest rates of 13.2 per cent and 12.7 per cent, respectively. The tenor, or amount of time, left on the five-year bond, however, is 4.355 years, while that on the 10-year paper is 6.33 years.

The Treasury had suspended long-term borrowing from the public after interest rates on short-term debt spiked upwards of 22 per cent last year. In its latest auction, however, CBK offered 91-day Treasury Bills to raise Sh4 billion at an interest rate of 9.9 per cent, down from 10.8 per cent the previous week.

In its renewed call for long-term funding, CBK, which is charged with raising funds on behalf of the Government, said the Sh25 billion would go towards ‘budgetary support’.

The Government has been on a borrowing spree that has seen public debt soar 60 per cent to almost Sh3 trillion since President Uhuru Kenyatta took office in 2013. This appetite for loans has been blamed on increased spending against relatively slower growth in revenue collection, forcing the Government to turn to debt. The current Budget deficit is about Sh480 billion.

Further, with the shilling weakening to levels above 100 units to the dollar, payments on dollar-denominated loans have increased, making borrowing in foreign currency unattractive.

With interest rates dropping, and in an effort to target retail investors, the Treasury is also expected to roll out the M-Akiba bond, which it suspended last year over high interest rates.

The Sh5 bond will enable individuals to make bids with as little as Sh3,000 and a maximum of Sh140,000, and can be transacted through mobile phones. Regular bond issues have an investment minimum of Sh50,000 and maximum of Sh20 million.

But with all the borrowing from the domestic market, there have been concerns that the Treasury will leave little cash that can be loaned out to private investors. The Government is guaranteed to pay back its loans, making it an attractive target for banks over individuals and private businesses.

However, in a policy statement, the Government said it would ensure the level of domestic borrowing does not crowd out the private sector, given the need to increase private investment to accelerate economic expansion.

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