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State issues Sh75b bond crowding out private sector

By Dominic Omondi | August 31st 2021
Gerald Muriuki, Research Analyst at Genghis Investment, Churchill Ogutu, Senior Research Analyst and Patrick Mumu, Research Analyst when they released a report predicting that the Nairobi Securities Exchange will offer investment opportunities for the year 2020. [Wilberforce Okwiri, Standard]

The Government is offering an infrastructure bond of Sh75 billion next month amidst fears it is crowding out the private sector from the credit market.

In a prospectus, the Central Bank of Kenya (CBK), the fiscal agent for the State, announced it would be offering the 21-year amortised bond between August 20 and September 7.

The cash will be used to fund infrastructure projects in the current financial year ending June 2022.

Analysts expect the bond, which will be traded in the secondary market, to attract a lot of liquidity due to its tax-free nature.

“The market is liquid in the initial sale period, and should this environment play out throughout the period of sale, we expect it to anchor subscription of the infrastructure bond,” said Churchill Ogutu, the head of research at Genghis Capital.

Being an amortised bond, its principal (face value) will be paid down regularly along with its interest expense over the life of the bond, an attraction compared to a bullet bond which is paid at maturity.

The 21-year infrastructure bond, noted Ogutu, is the longest infrastructure bond in two years.

“Investors would want adequate compensation to comparable 18-year infrastructure bond that was floated in April and see slightly higher yield as the comparable bond,” he noted.

Infrastructure bonds also tend to attract more foreign investors, a development that could help stabilise a weakening Shilling.

This is the first infrastructure bond being issued under a new legal framework which, for the first time, defines infrastructure bond.

However, the issuance of the bill will aggravate the crowding out of the private sector from the credit market, with the latest credit survey showing that banks will warehouse much of their deposits in government securities.

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