Why investors are hesitant to lend broke government

Treasury Cabinet Secretary Prof Njuguna Ndung’u with the Principal Secretary Dr Chris Kiptoo. FILE PHOTO | NMG

Investors are unwilling to lend the government billions of shillings in a push for higher interest rates amid a cash squeeze that has seen the State delay payment of civil service salaries.

Only one in four Treasury bonds offered this year have met their target, with the latest issue raising a measly Sh3.57 billion against a target of Sh20 billion, reflecting a performance of 17.85 percent.

Investors are forecasting higher rates in the wake of the cash crunch, forcing many to withhold investing in longer securities such as bonds in the hope that the rising returns have not peaked.

Read: Central Bank sets Sh50bn target for April bond sales

Instead, they have preferred to pack their money in the shorter 91-day Treasury bill, which has been oversubscribed by up to 643 percent, as they adopt a wait-and-see attitude over the trend of returns in the bond market.

Read: Aggressive bids push 91-day T-bill interest rate past 10 percent mark

Interest rates on bonds have ranged from 12.9 percent and 14.4 percent this year compared to returns of between 11.2 percent and 13.9 percent in the same period last year.

The 91-day T-bill hit double digits for the first time since February 2016 at 10.004 percent, from an average of 7.8 percent in June last year.

It posted a 643.29 percent performance rate last week as investors bid some Sh25.731 billion against just Sh4 billion on offer.

The apathy in the bond market has worsened the State’s cash squeeze caused by massive interest payments for Kenya’s mounting public debt.

President William Ruto won a hotly contested election last August having campaigned on a platform of lifting millions out of poverty, but he is facing challenges from the high cost of living and growing debt repayments.

“We are in a rising interest rate environment and as such, many would want to hedge against duration risks and hence the low subscriptions seen on Treasury bonds,” analysts at Sterling Capital said.

The analysts also linked the undersubscription to investors seeking returns above the sky-high inflation and the knowledge that the State could up its appetite to raise cash from the domestic market, bumping returns from Treasury bonds.

Read: Top listed banks record Sh55bn paper losses on bonds

Treasury data for the eight months to February reveal the impact of depressed domestic borrowing on State spending and the resulting cash crunch.

Domestic borrowing inclusive of debt rollovers plunged by 47.2 percent in the eight months to Sh333.3 billion compared to Sh631.1 billion raised in the same period a year earlier.

Churchill Ogutu, an economist at IC Asset Managers, said government spending will be depressed in the absence of further budget cuts as the trajectory of domestic borrowing remains lean for the remainder of the fiscal year.

“Reduced domestic borrowing will constrain fiscal operations in the absence of a second supplementary budget that brings down the budget expenditure to a more sustainable level. It will be a tough balancing act in the remainder of the fiscal year,” he noted.

Total revenues over the eight-month period trailed last year’s tally by some Sh27 billion or 1.45 as improved tax and higher foreign borrowing offset the decline from domestic borrowing.

Salaries delays

MPs had not received their March salary by April 7, a delay from the usual payment time of before March 26-30. But a section of lawmakers said the salaries were sent to bank accounts Tuesday morning.

David Ndii, President Ruto’s economic adviser, attributed the delays to the liquidity challenges posed by the rising debt repayments.

Also read: We will not borrow to pay salaries, Ruto says

Annual interest payments on the domestic debt alone have surged to Sh680 billion this year from Sh180 billion nearly a decade ago when the debt binge started, Dr Ndii said, heaping pressure on the government’s cash flow.

Treasury data show spending on debt repayments stood at Sh694 billion in the eight months to February compared to Sh667.2 billion in the same period a year earlier, reflecting a 4.0 percent rise.

Dr Ndii said Kenya will not default on its debt repayment obligations despite the cash crunch.

The debt burden, compounded by a weakening local currency and international market turmoil precipitated by a banking crisis, has caused some market participants to speculate that Kenya could soon default like Zambia and Ghana.

Nairobi has no plans to go down that route, Dr Ndii said.

“We are not insolvent. We can finance repayments. It is a significant sacrifice but we are actually able to pay,” Dr Ndii told Citizen TV on Monday night.

He said default was a “very bad idea” since it would force the government to “spend the next three to four years in very protracted debt restructuring negotiations.”

Rising inflation is forcing investors to put pressure on the State in search of better real returns. Kenya’s inflation remained unchanged at 9.2 percent in March on soaring food and fuel prices.

Inflation has remained outside the preferred government range of 2.5-7.5 percent since June last year.

The International Monetary Fund Tuesday said Kenya’s average inflation this year will stand at 7.8 percent.

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