The Central Bank has drawn first blood in a battle with investors over the value of Kenyan debt, rejecting Sh50 billion for a bond meant for infrastructure projects.
CBK had advertised the tax-free bond worth Sh40 billion and the market responded with Sh55 billion worth of bids, demanding an average of 13.026 per cent for the 15-year security.
However CBK, only accepted bids at a rate of 12.505 per cent, which saw it cherry-pick Sh5 billion, less that 10 per cent of what was put in the auction.
Market analysts differ on who will blink first in what could have repercussions on the overall lending market, including local borrowers and international creditors.
“I think Central Bank will win this one. They did that last year and won. Keeping the rates low, they are playing the banks which have too much money and nowhere to take it,” a local analyst who did not wish to be named said.
Since 2016, the apex bank has been trying to keep the Government yield curve and has not been accepting bids above certain rates. CBK knows that if rates on risk-free debt (to the Government) rise above the capped retail interest rates of 14 per cent, then ordinary borrowers will be completely locked out.
Credit to the private sector is already low, growing by 2.4 per cent in the 12 months to December 2017, slightly higher than the two per cent in October.
Some Treasury officials have, however, challenged this policy, saying it had caused investors to abandon long-term bonds and pack short-term paper, and that it will make it difficult for the Government to keep servicing local debt.
The country’s local debt maturity has reduced from 11 years to six since 2016 - meaning paying the Sh2.2 trillion debt will strain Treasury coffers in the coming years.
Deepak Dave of Riverside Capital, however, said the rate of interest in the bond was good for the Government since it showed investors were still willing to give it money.
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