Bond market sends Kenya slump signs

Yields on short-term bonds could increase and surpass those on long-term bonds as the repeal of the interest rate cap takes effect, new data shows.

The data analysed by the investment firm Dyer and Blair also explains that the new development could lead to a recession as the country's fiscal deficit continues to grow.

According to Dyer and Blair, the repeal of the rate cap is expected to add pressure on the government, with banks now finding the private sector more attractive to lend to than the fixed income markets.

“As long as banks lend aggressively to the private sector and foreign in-flows continue to support the equities market, as they have since December 2019, a competition for liquidity could force the government to issue new short-term papers at higher yields,” said Edwin Chui, research analyst as Dyer and Blair.

The investment firm's data shows that since 2013, the spreads on short-dated securities have increased while those on long-dated securities have narrowed.

The fiscal deficit for the 2020-21 financial year is projected to reduce to Sh569.4 billion from Sh715.2 billion in 2018-19.

Treasury has in the past found it hard to implement budget cuts. “While the domestic bond maturity profile seems benign, there are significant domestic coupon payments and treasury bill maturities to be serviced," Dyer and Blair said. "In addition, the onset of Standard Gauge Railway (SGR) principal payments should be put into account.”

Former Finance Cabinet Secretary Henry Rotich had revealed that SGR principal payments were to start in January 2020.

This is forcing the government to accept expensive bids for its papers, in order to secure funds from investors, further exacerbating the impending cash crunch.

The big four agenda projects are also expected to reduce the government’s commitment to fiscal austerity, even as it comes under pressure to pay off its pending bills.

According to the IMF, Kenya has other unreported liabilities such as pension obligations estimated at about 30 per cent of the Gross Domestic Product (GDP), Public Private Partnership (PPP) liabilities of about 3.5 per cent of GDP and future pension obligations to the social security sub-sector equivalent to about 3.3 per cent of GDP.