State runs out of space for more domestic loans

Treasury only accepted Sh16.6 billion against bids of Sh25.3 billion. [Courtesy]

The government seems to have run out of space to seek additional loans from local investors after it rejected bids running into billions of shillings for its securities.

This has left local investors, particularly commercial banks with the arduous task of finding the safest place to park their cash.

In its auction of the three Treasury Bills, short-term government securities, this week the National Treasury only accepted Sh16.6 billion against bids of Sh25.3 billion.

A week earlier, investors flush with cash responded warmly to the re-opened 20-year Treasury Bond, long-term government securities throwing a strong bid of Sh64.9 billion, a performance rate of 216.4 per cent.

However, the Central Bank of Kenya (CBK) which is the National Treasury’s fiscal agent, only accepted Sh19.7 billion, in what analysts say is informed by the fact that the Exchequer has already met its borrowing target for the current financial year ending this month.

“The government’s net domestic borrowing target of Sh521.9 billion, for financial (FY) 2020/21, has now been achieved with the borrowing of Sh521.7 billion,” said CBK in its weekly bulletin. Raphael Agung, Chief Economist at NCBA Bank, said Treasury is ahead of its borrowing target. “So they will only take what they had in plan,” said Agung.

At the beginning of the FY 2020-21, Treasury’s target for net domestic borrowing was Sh493.4 billion. However, with Treasury Cabinet Secretary Ukur Yatani surpassing target, he was forced to table a mini-budget to the National Assembly for approval on increased borrowing.

Mr Agung said the market is highly liquid, with investors, largely banks, looking for the safest place to channel the cash. “That liquidity is looking for a home,” said Agung, noting that the government security has a better risk-return profile.

Churchill Ogutu, head of research at Genghis Capital, an investment bank, said the rejection of the bids has translated into increased liquidity. “This high liquidity had a hand in the TAP sale announced this month with a quantum of Sh50 billion,” said Ogutu.

Much of this excess liquidity would have been channelled to the private sector, with banks lending more to firms and households.

“The credit market has not opened up as quickly given the difficulty around the macro-economic environment in view of Covid-19 pandemic,” said Agung.

Despite low yields, with interest on the 91-day T-Bill dropping to a seven-year low of 6.01 per cent, local investors, especially banks, parked most of their money in government papers.

The seven largest banks increased their investment in government securities by an average of 14.8 per cent last year to Sh1.03 trillion compared to Sh901.7 billion the previous year.

Co-operative Bank increased its share of investments by 44.2 per cent to Sh161.9 billion from Sh117.7 billion in 2019. Equity Bank, the country’s most profitable bank, parked an additional Sh40 billion into government securities, raising its stock of government paper to Sh162.3 billion.

The seven banks saw their income from the government securities increase by an average of 24 per cent. NCBA saw its income from securities increase by 82.6 per cent with the lender raking in Sh16.8 billion compared to Sh9.2 billion in 2019.

KCB recorded a 64.5 per cent increase in revenue from its lending activities to the government, earning Sh23.2 billion from Treasury.

Equity’s earnings from government securities increased by 23 per cent to Sh20.9 billion in 2020. Total loans to the private sector last year increased to Sh3 trillion from Sh2.7 trillion in 2019.