Plan to delay interest payment on State bonds rattles investors

Alexander Forbes Group chief executive Sundeep Raichura. [File, Standard]

Treasury plans to save close to Sh73 billion by requesting deferment of interest payments on government securities held by pension funds and insurance companies.

This is part of the National Treasury’s debt restructuring plan aimed at consolidating more funds to spend on the economy at a time when tax revenues are dwindling.

“The deferred interest will be amortised and paid with the interest due to be paid in the subsequent years up to the maturity of the security,” said Treasury in a report.

“Insurance companies and pension funds currently hold Sh913 billion in government securities, meaning deferred interest will save the government approximately Sh73 billion in interest payments in the short run and used to address the financing challenges created by the pandemic.”

However, Zamara Group Chief Executive Sundeep Raichura said while pension funds have held talks with the government on industrywide issues, deferment of interest has not been one of them.

“What we were saying is that you would substitute the interest with another instrument. The interest payment is converted into another government security,” he said, noting the participation of pension funds is also supposed to be voluntary.

“Every pension has its own liquidity record, and if you automatically defer for everybody, you create a problem. So it has to be done on a voluntary basis,” said Raichura, who also heads the Kenya Pension Funds Investment Consortium that brings together more than 12 pension funds.

Experts said deferring the interest rate as opposed to switching would be dangerous in that it would send the wrong signal to the market.

Earlier this year, CBK was able to replace several short-term government securities, known as Treasury Bills (T-bills), by a new infrastructure bond. 

“CBK conducted the inaugural switch on June 1, 2020 with the objective of lengthening the maturity profile of existing debt and to rebalance the T-bill portfolio which had concentration in the 364-day T-bills, accounting for 86.5 per cent,” CBK said in the 2020 annual report.

Consequently, CBK added, Treasury bills decreased by 6.9 per cent as the domestic debt maturity for all securities improved from 4.94 years in June last year to 5.46 years in June this year. The average maturity of bonds, on the other hand, rose to 7.9 years.

Part of Treasury’s plan to save some funds to be used for response against the effects of Covid-19 in the next two financial years will be debt restructuring, with T-bills being replaced with Treasury bonds or long-term government papers thus lengthening the maturity structure of domestic debt by targeting over 80 per cent of domestic debt to be held in longer-term Treasury bonds.

“This will ease fiscal pressure from expensive external commercial debt servicing and decrease issuance of shorter-dated domestic government paper to reduce refinancing risk and the public debt burden,” said Treasury in its Post Covid-19 Economic Recovery Strategy 2020-22.

The World Bank has asked Kenya to take advantage of debt relief measures to free up liquidity that would otherwise be absorbed by debt service.

“Making use of available international debt service relief and other debt optimisation strategies could contribute to releasing needed fiscal space,” said the World Bank in its latest Kenya Economic Update.

But restructuring its loans comes with the risk of downgrading Kenya’s credit rating as rating agencies could interpret such a move as a sign of financial distress. But times are hard, and the country is now grappling with how it will freeze repayment of Sh80 billion owed to several rich countries without jeopardising its credit standing. 

Churchill Ogutu, an analyst with Genghis Capital, said Kenya’s participation in the debt relief extended by the Group of 20 (G20) would not have any effect on the country’s credit rating as it does not involve private lenders. 

But China does not seem keen on such an arrangement, a situation that has made Kenya dither on taking up the offer. 

“China has played hardball in debt relief talks so far, insisting that loans from state-owned banks should be treated as commercial debt and not subject to the G20’s earlier debt relief initiative (the DSSI),” said William Jackson, the chief emerging economist at Capital Economics, a London-based economic research consultancy.

The government is in advanced talks with the International Monetary Fund for a Sh253 billion loan that will help the country fight the adverse effects of the pandemic.

The three-and-a-half-year loan will be given on condition that Kenya implements some belt-tightening measures, even as it mobilised more tax revenues.

The government is also expected to restructure some of its moribund parastatals, a situation that might result in job cuts.  

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