Hopes for a fall in interest rate fade as Kenya borrowing rises

Saturday May 14 2016

Kenya’s domestic borrowing appetite that will see it pay $3.69 billion in redemptions and interest in the new financial year spells doom for the hopes of a fall in interest rates, as financial institutions who consider government debt risk-free continue to show appetite.

In the budget summary paper submitted to parliament, Kenya is looking at repaying more than $1.72 billion in debt redemption and $1.97 billion in interest on its domestic debt even as it increases its deficit financing target to $6.8 billion.

With the current unfavourable international market conditions, the domestic market looks likely to offer the funds, stoking new fears of a crisis in access to credit for ordinary borrowers.

Kevin Tuitoek, a financial analyst at Genghis Capital, said that due to the current international market conditions of rising yields, Kenya will still have to borrow internally and that will push up interest rates.

“Kenya has indicated a possible second Eurobond in the latter half of this year, which means the government is intent on taking away the pressures from the domestic market, but from my analysis this will not work out. Domestic debt has always been the preferred stream of refinancing government obligations so the coming new financial year will be no different,” Mr Tuitoek said.

Already, Kenya has indicated that it will revise its domestic borrowing target downwards to $2.2 billion with a preference for foreign borrowing, but National Treasury Cabinet Secretary Henry Rotich admits that the current conditions in the international market aren’t conducive for the country, possibly pointing to domestic borrowing, which is currently attracting fair rates.


“External borrowing remains the preferred option for the government to source for financing on concessional terms. However, the borrowing terms have increasingly hardened,” Mr Rotich said.

Daniel Kuyoh, a senior investment analyst at Alpha Africa Asset Managers, said that there has been an intense appetite by the government to release short term paper into the domestic market.

“What we are seeing is investors opting for the shortest tenure government debt ahead of the anticipated interest rate increases, looking to have cash in hand to take advantage of the higher rates in the short term,” said Mr Kuyoh.