Oral East Africa>Banks keep away from debt auctions demanding higher interest At the hut of the story

Written by Oral East Africa

The government will pay heavily to borrow domestically as investors sense it has no option but to pay a premium to avoid defaulting on local bondholders as banks and insurance withdraw from the domestic market.

While last weeks T/Bill auction was undersubscribed at 87 percent performance with bids of Kes20.984 billion the government could only afford to pick up Kes18.7 billion to meet redemptions worth Kes14.4 billion. Treasury agreed to pay between 16.0 and 16.9 percent for loans below a year to meet the redemptions.

In the bond space, Kenya reopened 10-year and 20-year auctions that were also undersubscribed, receiving bids of Kes14.68 billion across the two papers against Kes.30 billion on offer. The CBK accepted Kes 6.752 billion and Kes 3.014 billion at rates of 16.5923 percent and 18.29 percent for the 10-Year and 20-Year respectively.

Kenya has even turned to printing money, to pay bondholders with the Central Bank of Kenya revealing they advanced the government Kes22.6 billion to meet bond interest payments.

Businesses have remained shut during the weekly Gen Zprotests for political accountability, meaning less economic activity, slower tax collection and an even wider fiscal deficit.

Kenyan domestic market has been spooked by Moody’s downgrade, a slowdown in economic growth, and the impact of the Gen Z protests for political accountability.

These indicate Kenya will struggle to raise money from taxes and loans when the country needs to make huge debt repayments which means it has to pay the price the market offers.

RejectFinanceBill 2024 and 2023

Cost of domestic borrowing will also be pushed up by perceptions from the Moody’s downgrade of Kenya’s local and foreign-currency long-term issuer ratings.

The downgrade reflects ‘significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend.

This weakness has further been entrenched by the Appeals Court rejection of Finance Act 2023 which will scrap back crucial raise on fuel taxes. Investors see Kenya struggling going forward after the economic recovery dispersed last month, slipping on recent political protests that have led to the closure of businesses, crippling of logistics, and collapse of consumption

Kenya’s PMI fell to 47.2 in June (51.8: May) indicating a significant deterioration in private sector business conditions, which was attributed to the ‘tough economic conditions brought on by the cost-of-living crisis as well as protests’.

Economic slowdown

Purchasing activity decreased for the first time in three months, in line with the downturn in demand.

The slowdown is a continuation of an economy struggling to keep apace after quarter one numbers showed real Gross Domestic Product grew 5.0 percent y/y in Q1, lower than the 5.5 percent in Q1 23.

The weaker pace of expansion was led by manufacturing, which grew 1.3 percent versus 2.0 percent in the prior quarter, while the construction sector barely expanded (0.1 percent vs. 2.2 percent in Q4 23).