Risk-averse investors shun Kenyan local debt, deepening fiscal woes

Nervous investors are avoiding long-dated Kenyan Treasury bills and bonds, central bank data showed, putting more strain on the government's plans to pivot to domestic borrowing after scrapping controversial tax hikes.

The latest debt sale, on Aug. 1, saw the benchmark 1-year Treasury bill get less than a tenth of demand for the amount on offer. That weak demand is making it even more expensive – and complicated – to fund the debt-burdened government's budget.

"It is going to be a problem and it feels like they are just kicking the can down the road," said Kenneth Minjire, senior associate for debt and equity at AIB-AXYS, a Nairobi-based brokerage.

President William Ruto abandoned tax hikes worth more than Sh346 billion ($2.67 billion) after protests that killed more than 50 people.

The U-turn forced the finance ministry to hike local borrowing targets by 42 per cent to Sh404.6 billion ($3.12 billion), even as securities, apart from 91-day Treasury bills, were already underperforming at auction.

Precipitous fall

Demand for Kenyan debt instruments at the central bank's weekly auction fell precipitously as domestic disruptions and violence engulfed major urban centres, data from the central bank showed.

Investors offered to buy just a third of what the central bank offered in Treasury bills during the week of June 24, when the turmoil erupted, while the subscription rates for that week's bond auction were just 2.4%.

Before the protests, the subscription rates for Treasury bills was 94.7 per cent, while bonds were oversubscribed.

Central Bank governor Kamau Thugge downplayed concerns over local financing, noting it was early in the financial year, and that even the revised borrowing target was lower than the previous financial year.

"I really don't see that we will not be able to meet the domestic financing requirements," he told a news conference on Wednesday.

The finance ministry did not respond to requests for comment.

'Over borrowing'

Finance Minister John Mbadi said the local debt portfolio was already too high. Total domestic debt stands at $750 billion, three times the stock of external debt, he told a parliamentary vetting panel on Saturday.

"We are over-borrowing domestically," he said, without commenting on whether he would cut the domestic borrowing target.

Mbadi, who was sworn into office on Thursday, could struggle to cut it. The Kenya Bankers Association, a lobby group, warned that the funding bill withdrawal and credit ratings downgrades that followed "risk constraining external funding options even more."

The country's Eurobonds have also slid, meaning if Kenya wanted to issue again, it would be more expensive.

Delay in IMF funding?

Potential delays in IMF funding also loom; Kenya had secured a staff-level agreement for the seventh review of its $3.6 billion bailout before the protests, but the board had not signed off.

Officials submitted a revised economic repair plan without the tax hikes, which it hopes will secure its next $600 million tranche.

But Ruto's efforts to fill the gap left by tax reversal are mixed; his pledge to cut Sh346 billion worth of spending was halved by the time the law passed, leaving more risk to the country's balance sheets.

"The path to achieving fiscal targets has become increasingly challenging," said Fitch, the global credit ratings agency, while downgrading Kenya's credit last Friday.

Further compounding the pressure, there are near-weekly attempts to rally and keep Ruto from increasing any other taxes, such as on fuel.

"We must stay glued to the issues," said Martha Karua, an opposition party leader.