National Treasury of Kenya. Global rating agency Moody’s has placed its
current B1 rating of Kenya on review for a downgrade, citing political
uncertainty, growing public debt and inadequate revenues to rein in the
budget deficit. PHOTO FILE | NATION
The National Treasury of Kenya has for the third month in a row
opted to raise money through the re-opening (known as “tapping”) of a
bond as it strives to hold interest rates steady in a tough economic
environment that has seen foreign investors shift to the
dollar-denominated Eurobond.
The Treasury, aware of the
environment, has opted to extend the sale period to a week, breaking
the previous trend of having a two-day sale window. It will be hoping to
raise Ksh16.5 billion ($159.1m) through the the five-year bond, which
offers a 12.5 per cent yield.
“Bids shall be priced at
the weighted average rate of the accepted bids for the bond auction
dated October 23, 2017 and adjusted for accrued interest,” said the
Central Bank of Kenya in its offer.
Foreign investors
have however been cautious about buying local Treasury bills and bonds
at a time when the shilling has taken a considerably beating which would
result in hurting them when they opt to withdraw their funds.
They
have opted to invest their money in the Eurobond, which has seen the
yield of the five-year bond fall to four per cent, indicating that
investors are betting on the country remaining stable and an attractive
investment destination despite the political anxiety. The 10-year bond
has dropped 6.3 per cent.
Kenya issued the bond in 2014 at a coupon rate of 6.785 per cent for the 10-year and 5.875 per cent for the five-year tranche.
“Foreign
investors currently do not want to hold local bonds because they expect
the currency to weaken but don’t want to run away from the country so
the Eurobond yield has been going down as demand goes up,” said Alex
Muiruri, the head of fixed income at Kestrel Capital.
B1 rating
Global
rating agency Moody’s has placed its current B1 rating of Kenya on
review for a downgrade, citing political uncertainty, growing public
debt and inadequate revenues to rein in the budget deficit. If the
downgrade occurs, Eurobonds will trade at higher yields as investors
price in the risk.
Notably, the bond sales have proven
popular with full uptake driven largely by banks which have excess
liquidity. In August, the Treasury raised Ksh25 billion ($241m) by
tapping a 10-year bond and a further Ksh13 billion ($125.4m) in
September.
“The bonds secondary market has witnessed
suppressed volumes with investors banking on primary auctions they have
been the result of increased tap-sales by CBK on on-the-run issues,”
said Sterling Capital.
The Treasury has been using tap
sales in a bid to keep a lid on interest rates in order to avoid
destabilising a market operating under interest rate regulations.
“The
government believes the yield curve should remain static with the
purpose of making people disciplined and not to bid higher, which is in
line with interest rate cap environment,” said Mr Muiruri.
Commercial
banks are currently struggling with excess liquidity occasioned by a
drop in credit growth attributed to interest rate caps making it
unattractive to lend to the private sector, especially those enterprises
perceived as risky.
Banks have preferred to put their
money in the bonds, whose yields average 12 per cent — close to the
current cap of 14 per cent. The bonds carry a lower risk premium, unlike
lending to the private sector, which is expected to have adverse
effects when a new accounting standard, IFRS 9, takes effect next
January.
Analysts queried how long the government was
willing to continue with this strategy ,given that it is crowding out
the private sector from access to credit.
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