Government borrowing is set to increase in the six months to end of the 2018/19 financial year as lenders shift interest in lending to the government.
This will negatively affect credit growth in the private sector, to below the average 4.15 per cent as banks prefer less risky securities. The decline would also see less financing to small-scale enterprises and other key sectors.
Total borrowing target for 2018/19 was Sh0.6 trillion but government has been behind the targets by Sh20 billion between July and September 2018.
A report by Cytonn showed that public debt grew by Sh110 billion in the period with domestic debt accounting for Sh60 billion compared to Sh50 billion external debt.
This was against an estimated target of Sh130.7 billion to represent a 15 per cent dip.
According to Cytonn senior investment analyst Caleb Mugendi, financial institutions would focus to government that has continued to issue bonds and as five-year bonds issued in 2014 are expected to mature in end of the six months.
“We expect borrowing to pick up in the last two quarters as the government in not in a bad situation. There is a still demand for government money with its increased issuance of bonds,” Mugendi said.
The government has been increasing domestic borrowing despite the performance of the bonds in the market.
Central bank data showed that the Sh40 billion 10-year bond at the week ending December 27 was undersubscribed receiving bids worth Sh6.6 billion against the advertised target of Sh13.84 billion.
The turnover for bonds in the week ending January 3 had also declined by 58.7 percent. Yields on five-year bonds declined, with an increase in yield for the 10-year and 30-year bonds.
“Liquidity is quite low indicated by decline in average inter-bank rate and this will help to increase attractiveness of the bonds to banks,” Mugendi added.
The indication of the government to be in pressure to borrow follows a similar trend in the beginning of 2018. The government was as well behind both domestic and foreign borrowing targets for financial year 2017/18. Kenya Revenue Authority faced challenges in meeting tax collection targets due to low corporate earnings in the year.
However, it surpassed its domestic borrowing target for the same year having borrowed Sh390.2 billion against a target of Sh297.6 billion.
The government borrowed 79.1 per cent of its foreign borrowing target with the estimate having been revised up to Sh323 billion.
Private sector credit growth picked up last September to 3.9 per cent. The growth continued gradually recording a high of 4.4 percent in the 12 months to October 2018 driven by strong growth in manufacturing, business services, finance and insurance, and building and construction sectors.