The Kenyan government has reduced its domestic market borrowing through long-term debt instruments, following the successful issuance of the Eurobond.
The Treasury accepted lower bids in its latest Bonds auction. During the week of the Eurobond issuance, the government sought to raise $388 million for budgetary support by issuing two Treasury bonds with coupon rates of 10.3 per cent and 12 per cent respectively. However, Treasury accepted just $130 million, despite the bids coming in at $240 million.
“The low acceptance rate was due to the Eurobond being issued as the government started to adjust its borrowing. We don’t expect the government to come under pressure to borrow for the current fiscal year. This adjustment would be made to accommodate the Eurobond issue. The government has not reached its domestic borrowing cap, and would therefore be under no pressure to borrow more on the domestic front,” said analysts at private equity firm Cytonn Investments said in a note this past week.
Analysts expect the yield on domestic borrowing to come down in the next few weeks, on reduced government demand for cash.
“The government’s appetite for domestic debt has dropped and it is likely that they are digesting the cash from the Eurobond,” said Deepak Dave, founder of Riverside Capital, an Africa-focused debt advisory firm. “If they don’t restrict T-Bill issuance for a few weeks as the funds come in, we will see bizarre swings in the exchange rate.”
The country currently has a $22 billion domestic debt stock and is keen to bring it down amid short-term debt rollovers. In 2018, the country will have local debt maturities of up to $8.5 billion.
Last week, Treasury bill rates fell to 8.029 per cent for the 91 day tenor and 10.393 for the six month tenor, while the 364-day tenor increased marginally to 11.135 per cent. The government accepted $306.17 million out of the $240 million it was seeking, after it received $373.92 million.
In the two months following the June 2014 Eurobond issue, the 91-day Treasury bill rate came down by 2.8 percentage points. At that time, Kenya also cut its domestic debt target for the 2014/15 fiscal year by about 50 per cent.
“The issuance of the current Eurobond is likely to mirror the effect of the first bond issued four years ago, where the market witnessed a fall in yields after the government slowed its domestic financing appetite. Combined with the persistently sound interbank liquidity, this should enhance downward pressure on yields across the curve,” analysts at Commercial Bank of Africa said in their weekly fixed-income report.
Kenya issued its second $2 billion Eurobond at the London Stock Exchange last Wednesday, with coupons of 7.35 per cent for its 10 year bond and 8.35 per cent for the 30-year bond, a first on the continent.