DEBT

Floating of Sh150bn local bond bad for economy - experts

Kadzutu criticized the move to borrow to repay pending bills, saying it is bad for the economy

In Summary
  • Low lending to the private sector is said to the the main factor that curtailed Kenya's economic growth in last two financial years.
  • The country has been witnessing lower subscription of Treasury auctions just before and since the rate-cap repeal decision, amid low yield.
Treasury
Treasury
Image: MONICAH MWANGI

Floating of Sh150 billion infrastructure bond  at once will crowd out the private sector, experts have cautioned.

On Tuesday, President Uhuru Kenyatta announced that the government plans to issue Sh150 billion note which will be partially used to clear pending bills.

The amount is part of the Sh800 billion infrastructure bond expected to be issued in next two years to enable the government deliver on its pledge of constructing 10,000km of roads by 2022.

 
 
 
 
 

“With the planned infrastructure bond of Sh150 billion, all infrastructure-related bills will be settled early this year and aid the completion of all ongoing road and infrastructure projects across our homeland,” Uhuru said.

Experts are however divided on the government's ability to raise the amount at once in local bond and effects to the country's economy.

Economist Reginald Kadzutu told the Star that raising Sh150 billion in one issue will crowd out private sector, so much for interest rate cap removal.

He urges that although the amount is realizable due to excess liquidity in the banking sector, the move will hurt lending to the private sector, which has been improving since it slumped to a low of 2.4 per cent in 2017.

Low lending to the private sector is said to the the main factor that curtailed Kenya's economic growth in last two financial years.

He however criticised the move to borrow to repay pending bills, saying it is bad for the economy.

''We are borrowing to pay bills now, that in itself is a red flag. Debt distress,'' Kadzutu tweeted.

 
 
 
 
 

Others, however, think the government will be forced to pay more to lure investors into buying a local bond, as banks revert to conventional lending after scrapping of interest cap law, experts have said.

''With a pick-up in credit growth post interest cap law, we expect upward pressure on Treasury yields to emerge as banks’ demand for the instruments drops,''

The country has been witnessing lower subscription of Treasury auctions just before and since the rate-cap repeal decision, amid low yield.

According to CBK weekly bulletin issued Friday last week, Treasury bonds attracted an average interest rate of 11.49 per cent compared to 12.39 per cent in the week ending October 31 last year.

''The single drawback, on a macro level, is probably going to be elevated borrowing cost for the government, adding to pressures on an already tight fiscal stance,'' economists at EFG Hermes Kenya said.

The Institute of Economic Affairs CEO Kwame Owino, on the other hand, thinks the Treasury has been complicit in the extremely high rates of interest for government debt.

"Bank profits last year were virtually government paper. If I was at Treasury, why would I be paying them 12 per cent now? Where would they go if I placed that paper at five per cent?,'' Owino said.

He added:  "The main risk is that the government has no time now but I just think that the largest borrower on East Africa shouldn't be paying an interest rate this close to the retail borrower. It's an atrocious and bad Treasury management."

Financial analyst Aly-Khan Satchu says he will be keeping a close eye on the yield curve, expecting Treasury to yield to pressure and raise its rate.

''With the government's appetite still so large a unilateral repricing might meet a buyers strike and then the outcome would be quite unpleasant,'' Satchu said.