Risk-averse investors shun Kenya’s local debt, exacerbating fiscal woes By Reuters

By Duncan Miriri

NAIROBI (Reuters) – Nervous investors are shunning long-term Kenyan treasury bills and bonds, central bank data showed, putting more pressure on the government’s plans to turn to domestic borrowing after ditching controversial tax hikes.

The most recent debt sale, on Aug. 1, saw the benchmark one-year T-bill fetch less than a tenth of demand for the amount on offer. This weak demand makes it even more expensive – and complicated – to finance the debt-ridden government’s budget.

“It’s going to be a problem and it feels like it’s just kicking down the road,” said Kenneth Minjire, senior debt and equity associate at AIB-AXYS, a Nairobi-based brokerage.

President William Ruto scrapped tax hikes worth more than 346 billion shillings ($2.67 billion) after protests that killed more than 50 people.

The turnaround forced the finance ministry to raise local borrowing targets by 42 percent to 404.6 billion shillings ($3.12 billion), even as securities other than 91-day treasury bills, they were already underperforming at the auction.

RAPID FALL

Demand for Kenyan debt instruments at the central bank’s weekly auction fell sharply as internal unrest and violence gripped major urban centers, central bank data showed.

Investors offered to buy only a third of what the central bank offered in Treasury bills in the week of June 24 when the turmoil erupted, while subscription rates for the bond auction that week were just 2 .4%.

Before the protests, subscription rates for T-bills were 94.7 percent, while bonds were oversubscribed.

Central Bank Governor Kamau Thugge played down concerns about local funding, noting that it was early in the financial year and that even the revised borrowing target was lower than the previous financial year.

“I really don’t see that we won’t be able to meet the domestic funding requirements,” he told a news conference on Wednesday.

The Finance Ministry did not respond to requests for comment.

“EXCESS LOAN”

Finance Minister John Mbadi said the local debt portfolio is already too large. Total domestic debt stands at $750 billion, three times the stock of external debt, he told a parliamentary scrutiny committee on Saturday.

“We are over-borrowing domestically,” he said, without commenting on whether he would lower the domestic borrowing target.

Mbadi, who was sworn in on Thursday, may struggle to shake it off. The Bankers’ Association of Kenya, a lobby group, warned that the withdrawal of the funding bills and the credit ratings that followed “risk further constraining external financing options”.

The country’s Eurobonds have also fallen, meaning that if Kenya wanted to issue again, it would be more expensive.

DELAY IN IMF FUNDING?

Potential delays in IMF funding also loom; Kenya secured staff-level agreement on the seventh review of its $3.6 billion bailout before the protests, but the council did not approve.

Officials have unveiled a revised economic recovery plan without raising taxes that they hope will secure the next $600 million tranche.

But Ruto’s efforts to fill the gap left by the tax inversion are mixed; His pledge to cut 346 billion shillings in spending was halved by the time the law was passed, leaving more risk to the country’s balance sheets.

“The path to achieving fiscal targets has become increasingly difficult,” global credit rating agency Fitch said as it downgraded Kenya’s credit last Friday.

Adding to the pressure, there are almost weekly attempts to rally and prevent Ruto from raising any other taxes such as on fuel.

“We have to stick to the issues,” said Martha Karua, an opposition party leader.

($1 = 129.5000 Kenyan shillings)