Flat demand signals drop in credit rates

Money Markets

The Central Bank of Kenya. The bank’s latest data shows that total government securities have reduced. PHOTO | FILE |  NATION MEDIA GROUP

By CHARLES MWANIKI

In Summary

• Total government domestic debt stands at Sh1.282 trillion, compared with Sh1.283 trillion at the beginning of July.
• The Treasury has nevertheless raised its overdraft facility at Central Bank almost to the statutory limit.
• With rising inflation however, the government faces a tough balancing act on keeping yield levels on its debt low, given investors will demand a compensating premium to maintain the value of their investment.

Government borrowing has remained flat since the beginning of the current financial year in July raising hopes this could push banks to cut lending rates as they shift focus to the private sector.

Total government domestic debt stands at Sh1.282 trillion, compared with Sh1.283 trillion at the beginning of July.

Latest CBK data shows total government securities have reduced by Sh23.3 billion to Sh1.212 trillion since the beginning of the month due to maturing issues.

Kestrel Capital analyst Linet Muriungi said in a second half 2014 macroeconomic review that money demand-supply dynamics would be the factor determining whether interest rates on loans and advances ease off slightly following the reduced government borrowing in the domestic market.

“With Sh64.1 billion of Treasury Bonds maturing by December 2014 and not 100 per cent of this debt being rolled-over into new government securities, we believe this increased supply of cash will result in private sector credit growth and slight easing of interest rates as banks try to aggressively grow their loan books,” said Ms Muriungi.

The Treasury has nevertheless raised its overdraft facility at Central Bank almost to the statutory limit, standing just Sh800 million shy of the limit at Sh38.3 billion.

The National Treasury had reduced the overdraft to Sh13 billion in the first week of August but has raised it in September following heavy maturities of the treasury bonds.

READ: Treasury cuts CBK overdraft to one year low of Sh13bn

With the overdraft normally coming in to bridge borrowing deficit on shorter term basis, the actual cumulative borrowing balance remains flat.

With rising inflation however, the government faces a tough balancing act on keeping yield levels on its debt low, given investors will demand a compensating premium to maintain the value of their investment.

Investors have shown a willingness to roll over maturing short-term Treasury Bills into longer durations at higher yield, with the recent five and 30-year-bond issues attracting heavy bidding as opposed to three- and six-month T-Bills that have been underperforming at the auction.

In August, the five- and 30-year bond issues which targeted Sh15 billion attracted bids worth Sh27.9 billion at average rates of 11.1 and 13.7 per cent respectively.

Investors were attracted by the opportunity to lock in higher yields for the long term at a time interest on the short-term paper are at 8.6 per cent.

“The increased premiums will push up the yield curves though this will be limited by the government’s plan to increase the proportion of foreign debt in its debt portfolio as well pursue a new interest rate environment. Nonetheless, on a longer-term scale we anticipate an upward shift in the yield curve,” said Genghis Capital analyst Vinita Kotedia.

cmwaniki@ke.nationmedia.com