Interest rates are expected to start falling and the Kenya shilling will strengthen as the Treasury kicks off a programme that will see the country borrow $600 million from international banks.

Sources told The EastAfrican that Finance Minister Uhuru Kenyatta will this Monday announce that the Treasury has hired foreign banks to market Kenya’s first dollar-denominated syndicated loan from foreign banks.

Citibank, Standard Chartered of UK and Standard Bank of South Africa are the arrangers of this loan. These banks will form a consortium of other foreign banks who will share a portion of the loan.

Tanzania last year similarly borrowed $250 million from foreign banks. This is the second time Kenya has tapped the international debt market for a loan.

In 1989, Kenya issued a Yankee bond with the help of Citibank and Lazard Frères & Co, an America investment bank.

As interest rates rose and the shilling weakened over the past six months, the Treasury has been having a hard time trying to borrow from the domestic market.

The Treasury sought to borrow Ksh199 billion ($2.34 billion) from the Kenyan market to plug the deficit in the current budget, but with interest rates at 18 per cent this would make the debt very expensive to service, hence the decision to tap the foreign debt market.

High interest and exchange volatility in the Kenyan market have made investors — mainly banks and pension funds — edgy, so they are demanding higher yields to compensate for risk.

With many of them shying away, the Treasury has found itself short of an estimated Ksh60 billion ($675 million) on its borrowing programme for this year.

Contigency plan

The $600 million syndicated loan will substitute part of what it planned to borrow from the domestic market this year.

Details of the terms of the loan are still scanty but The EastAfrican has learnt that Kenya now opted for a dollar loan that will be syndicated offshore and that will mainly target the big names in international financial markets.

Among the international banks that have been invited to participate are BNP Paribas, Bank of Tokyo, Goldman Sachs, Standard Bank of South Africa, Barclays Capital, CitiGroup, Bank of America and Credit Suisse Bank.

In the current financial year, the government had programmed to borrow $2.34 billion from the domestic market through the weekly Treasury bill and bonds, mainly to fund its development budget.

But with the country already in the middle of the financial year, it was becoming increasingly clear that the borrowing programme for the current budget was going to experience major hitches.

For most of last year, Kenya has been grappling with a quiet investor rebellion manifested by poor subscriptions on Treasury bond and bills.

Cautious

With interest rates moving up unpredictably and the exchange rate facing unprecedented volatility, investors — mainly local banks and pension funds — were keeping away from participating in the auctions.

The upshot is that the Treasury has, as stated, found itself short of an estimated Ksh60 billion ($675 million) on its borrowing programme for this year.

The Treasury’s options were limited under the circumstances.

Reducing expenditure by a margin of the shortfall in the borrowing programme could only happen at the risk of major disruptions of infrastructure projects, a good number of which are in different stages of implementation.

And, while seeking concessional lending was an option, concessionary financing, especially from multilateral lenders, not only comes with long delays in disbursement but also excessively intrusive conditionalities often requiring the country to implement politically unpopular policies.

Under the circumstances, the most realistic options was a bond floated in the international marketplace. Two major factors made this option unviable.

First, the economic fundamentals were not right at that time — interest rates were moving up unpredictably and the exchange was unstable.

Secondly, floating a bond in an election year was going to be a gamble. It is against this backdrop that the Treasury decided to go for a syndicated loan.

The Treasury calculates that it is going to gain several advantages from this. First, as the syndicated loan has been structured to disburse in a matter of months, it will be a viable source of funding the shortfall in the domestic borrowing programme.

Secondly, the syndicated loan is going to increase the country’s forex reserves position. Thirdly, the Treasury is calculating that the syndicated loan is going to prove to be a cheaper source of funding infrastructure than money raised domestically.

It remains to be seen how the syndicated loan will impact on macroeconomic stability. The chances are that new dollar flows will reduce pressure on the exchange rate. Still, the most dramatic effect is expected in the market for Treasury bills and bonds.

With fewer and fewer Treasury bill auctions and as the government gradually shifts from borrowing locally to internationally, Treasury bill rates are bound to come down.

The financial markets are about to witness a collapse in the Treasury bill market only comparable to what happened when the Treasury bill fell to below 1 per cent with the advent of President Mwai Kibaki’s administration in 2002.

Lending rates will start trending downwards, with banks forced by circumstances to start lending to individuals and businesses again.