Wealthy investors and financiers like banks and pension schemes are pressuring the Central Bank of Kenya (CBK) to raise the cost of government borrowing as global lending rate hikes make local assets less attractive.
Investors are unwilling to lend the government billions of shillings to drive up interest rates, signaling a funding headache awaiting the new administration.
But the CBK has resisted efforts to push bond rates above the 14% mark, which will reward investors while making it costly for the Treasury to borrow when commercial bank lending rates could rise. .
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Since July this year, the CBK has borrowed 93.2 billion shillings in bonds, or 58.2% of the 160 billion shillings sought by the government.
The CBK may have to accept offers at higher prices if it wants to improve the performance rate of bond issues in the future, analysts warn.
“Expectations of higher inflation coupled with the sovereign’s preference for local deficit financing continue to drive interest rate projections,” NCBA Group said in an economic update.
“The CBK, however, remained keen to reject costly bids in a bid to contain the upward adjustment in yields and anchor the government’s cost of borrowing.”
The CBK faces the challenge of keeping borrowing costs manageable for the new administration amid reluctance to access foreign commercial loans due to their rising costs.
The Treasury recently scrapped plans to issue at least $1bn (120bn shillings) of Eurobonds after interest demanded by investors doubled to around 12% from 6.3% a year earlier. earlier for a similar amount.
Over the past three financial years, Kenya has made extensive use of cheaper concessional loans, helping to slow the accumulation of expensive short-term foreign trade credit and loans from rich countries that are largely granted on semi-concessional terms. concessional.
Rising global borrowing costs are being badly received by developing countries, many of whom are struggling to return to pre-pandemic levels of economic output.
High borrowing costs are linked to the decision of a host of central banks around the world to raise interest rates in a global fight against inflation that is sending shockwaves through financial markets and economies .
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The US Federal Reserve set the tone on Wednesday with a 0.75% rate hike, its fifth since March, and half a dozen central banks, from Indonesia to Norway, followed suit with hikes of similar or identical size within hours.
Low yields in the Kenyan market mean that investors are looking for better returns in overseas markets which have recently become more attractive as global rates rise.
Investors demanded more than 14% for three long-term bonds, but the CBK accepted only 13.9% on a 15-year bond, 13.9% on a 20-year bond and 13.8% on another 15-year bond.
Since the start of the fiscal year, on July 1, the Treasury has issued four bonds in nine tranches, most of which have fallen well short of increasing their target amounts.
This has led the CBK, which acts as the government’s fiscal agent, to reject offers worth 66.8 billion shillings since July.
This could impact the government’s target to raise 565 billion shillings domestically to fill the 845 billion shilling hole in the national budget for the year ending June 2023.
Rate hikes also tend to trigger outflows of dollars to safe havens in the developed world, which ultimately depress the value of the local currency.
In Kenya, the shilling has weakened 6.1% to 120.1 units against the dollar since the start of the year, compared to a depreciation of 0.5% over a similar period in 2021.
Genghis Capital economist George Bodo says an investor will need outsized returns on assets denominated in Kenyan currencies to compete with rates offered in developed markets.
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“To ensure capital flow rigidity and offset rate hikes in the United States and Europe, emerging markets now need to raise returns on domestic assets,” Bodo said.
Expensive borrowing will hurt the administration of President William Ruto, which is battling the effects of soaring public debt.
Besides debt, Dr Ruto will also have to lead an economy beset by a pandemic, rising food and fuel prices spurred by war in Ukraine and the worst drought in four decades.
The new president, in his first speech to the United Nations, marked his preference for the debt restructuring that had been proposed by his rivals in the Azimio coalition when he asked multilateral lenders and the Paris Club of rich countries to reschedule the debt of developing countries.
“The World Bank, IMF and other lenders must extend pandemic-related debt relief to the countries most affected, especially those affected by the devastating combination of conflict, climate change and Covid-19” , did he declare.
“The G20 must also suspend or reschedule debt repayments for middle-income countries during the pandemic recovery period.”