Tough times for Treasury as lenders hold back, demand high returns

A week after the Central Bank of Kenya (CBK) was forced to cancel the issuance of a reopened 15-year bond, the government’s path towards funding its coffers is getting more slippery.

Raising debt from investors after showing signs of being broke and even failing to pay salaries for a section of civil servants has become a tall order as investors seek to cover risks by demanding high returns.

The attempt to raise Sh30 billion from the domestic market saw the reopening of a 15-year bond first sold in 2019 and a three-year paper first sold last year.

The three-year bond only managed to raise Ksh.1.76 billion barely two weeks after another bond auction targeting Sh20 billion only yielded Ksh.3.6 billion in the first tranche.

Data shows that investors demanded two per cent higher returns above the offered coupon in the three-year bond, a scenario that is likely to play out in the near future and which may force the government back to the drawing board in plugging its yawning cash deficits.

The tough scenario is also evident in the international market where investors are likely to be attracted by the higher yields on the dollar bonds and with the shillings’ recent freefall, borrowing from the international market is not only becoming difficult but also very expensive.

The Treasury however remains trapped between the high cost of debt and the risk of defaulting on maturing ones. This has already pushed the government to plan floating an international bond to help meet the $2 billion dollar Eurobond repayment due in the next financial year.

With just $6.3 billion in foreign reserves and which has remained the desired four months’ cover, it is almost certain that the country will have to seek foreign debt despite the unfavourable market situation, probably worse than how it was when a Ksh.115 billion bond was cancelled in June last year.

The low acceptance from the bond auction will continue to pile pressure on the exchequer’s domestic borrowing targets for the 2022/23 fiscal year just under two months away.

The Kenya Revenue Authority which has been struggling to meet revenue collection targets also faces more pressure as the treasury faces more hurdles in accessing debt both at home and abroad.