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Kenya struggling to secure long term financing -PKF

Rising interest rates reduce the market value of bonds, leading to unrealised losses for banks.

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by JACKTONE LAWI

Kenya11 June 2024 - 14:02
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In Summary


•However, despite the shilling having gained ground significantly against major international currencies the interest rates have held at a high of 13 percent compared to an average of 10.5 per cent in 2023.

•PKF chief Executive officer Alpesh Vadher said that the experience of bond investors last year has brought investor apathy as they tread with caution.

PKF chief Executive officer Alpesh Vadher

Kenya is grappling with long term financing for its operations as last year's market volatility still continues to impact the market, according to business advisory firm PKF.

PKF said the high interest rates and depreciation of the local currency against the dollar last year drove down the valuation for the bonds held by investors deepening apathy for new long term government papers.

PKF chief executive Alpesh Vadher said that the experience of bond investors last year led to investor apathy with most treading with caution.

Investor apathy refers to a lack of interest, enthusiasm, or engagement from investors towards investing in financial markets, specific sectors, or particular assets.

Rising interest rates reduce the market value of bonds, leading to unrealised losses for banks. These losses impact the banks' capital for bonds held for trading and available for sale.

“At the moment government is unable to borrow long term because a lot of investors last year lost money because interest rates went up and when the interest rates go up the prices of bonds go down so a lot of people took a hit from the valuation of their bonds, “said Vadher

He said currently the Central bank is struggling to get long term financing.

However, despite the shilling having gained ground significantly against major international currencies the interest rates have held at a high of 13 percent compared to an average of 10.5 per cent in 2023.

Vadher noted that there has been an improvement in 2024, mainly due to renewed confidence in the financial markets.

Successful pricing of a new 9.75 percept $1.5 billion (Sh194billion) Eurobond and the issue of Infrastructure Bonds, which attracted both local and foreign investors, brought about the confidence.

Many local investors therefore switched their investment from foreign currency bank deposits to Infrastructure bonds hence releasing and increasing the supply of foreign currency in the market. The bond also attracted interest from foreigners as well.

“There are a lot of sentiments in the market that once the currency, the market and interest rates stabilise then the government can revert to the market for long term bonds,” added Vadher.

As of November last year Kenyan banks were holding up to $10.7 billion (Sh1.38 trillion) worth of Treasury bonds that were at risk of losing significant value as a result of the high interest rate regime sustained by the government’s increased borrowing from the domestic market.

This threatened to impact liquidity and the ability of the lenders to meet maturing debt obligations.

Economists say investors in bonds are now looking for returns that are commensurate with the risks they are taking to invest in long-term paper, and if they don’t succeed they go back to short-term instruments – Treasury bills.

PKF Tax manager for Kenya Kevin Chege called on the government to immediately implement the National Tax Policy with the Finance Bill, 2024 and ensure that the proposed amendments are aligned with the National Tax Policy.

"Businesses want predictability [because] with it, they can make long-term decisions. We need to target those who evade taxes, especially in the informal economy, and align our policies with international standards to prevent losing investors to neighbouring markets."

The advisory firm said noted that the government needs to consider some of the proposed amendments that are repugnant to the provisions of the National Tax Policy.

The firm noted that if the National Tax Policy were well implemented, it would provide much certainty to investors as they make investment decisions and thus make Kenya an attractive investment destination.

 

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