Treasury set to borrow more locally as foreign credit gets expensive

Kenya will rely more on local borrowing to finance this year’s budget gap as unfavourable conditions have made external credit unattractive, financial experts have said.

Global assets manager PineBridge Investments has predicted that Kenya will have to rely on domestic market because borrowing internationally has become too expensive for African countries.

PineBridge Investment CEO Jonathan Stichbury said the risk from hard currency sovereign borrowing such as the Eurobond, which require foreign exchange support to repay, will push the National Treasury away from the international market.

“We expect to see additional pressures on revenue financing with aggressive tax collection being required and additional taxes being levied in 2016,” Mr Stichbury said.

The National Treasury is putting together a supplementary budget set to come out next month. It is expected that the budget will see cuts in spending, consolidation of expenditures and restructuring of the debt ratios.

In the current budget, Kenya expected to raise Sh340 billion from external financing and Sh229 billion from the domestic market to meet the deficit.

“There has been some talk of revised budget plans to be presented soon. That could potentially cut some elements of spending and reshuffle others,” Africa Global Research Standard Chartered Chief Economist, Razia Khan wrote to Smart Company on email.

Ms Khan said that traditionally, Kenya has been able to tap the domestic market for its financing needs – hence the depth and liquidity of the Kenyan bond market.

“Should external conditions remain difficult, we will almost certainly see more reliance on the domestic market,” she said.

Over time, she said, as the economy continues to grow, the size and depth of the Kenyan bond market will increase. The likelihood that the Treasury will resort to domestic borrowing may spook the local market with investors demanding premium rates to lend to the government at the expense of the economy.

LIQUIDITY IS STRESSED

Ms Khan says that the mention of the external borrowing may have been a way of relieving pressure on the domestic market, at a time when liquidity is already stressed by events in the banking sector, and when the Central Bank of Kenya (CBK) has tightened considerably.

She said liquidity has normalised and with inflation outlook not that grim, the CBK may even start lowering interest rates.

“Any external issuance will likely be deferred to when some calm has been restored to markets.  It does not make sense to borrow significantly, especially when trying to lengthen the tenor of borrowing, given the current state of international capital markets,” she said.

The National Treasury has hinted at fresh plans to return to the international market to source for more funds, including the option of another Eurobond, to plug deficits in the national budget although analysts say this is unlikely in the short term.

“Whatever deficit we have we will have to finance it by borrowing. Such borrowing will be a mix of local and external borrowing ranging from direct bilateral loans, export credit agencies, new products like Sukuk and Samurai bonds, and all other products in the international market including also going back to the Eurobond. We are not ruling out that,” National Treasury Cabinet Secretary Henry Rotich (left) said.

Dimming oil prospects, slower economic growth and scandal over Eurobond proceeds means Kenya will pay a higher premium if it goes back to the international markets.

In 2014 Kenya issued a total of $2 billion with a weighted average interest rate of 6.6 per cent in Europe, Middle East and the US.

According to Bloomberg Markets, the return on the country’s $2 billion bond, trading in the Irish stock market, climbed 124 basis points in the just a month to 9.23 per cent in December. While this does not affect the rate at which Kenya services the debt, it means the country cannot issue a new Eurobond at a rate less than 9 per cent at the current market position.