Kenyan Shilling Continues to Depreciate Against the US Dollar

Treasury bill auctions were highly oversubscribed during the week, with a 180.1% overall subscription; this is the first time we have seen this level of subscription for more than two months. The increased subscription is evidence to the increased liquidity in the market, brought about by government expenditure, Kshs. 16.6 bn worth of government securities maturities during the week, and Term Auction Deposit maturities.

Despite the high liquidity, investors continue to demand a huge premium to invest in treasuries and hence we saw a significant jump in treasury bill yields across all tenors, with yields at 13.9%, 12.9% and 14.9% from 11.5%, 12.3% and 13.9% for the 91-day, 182-day and 364-day paper, respectively. For the 2015/16 fiscal year, the government has experienced a net redemption in their borrowing of Kshs. 29.6 bn, and given the current net redemption position, the government is under pressure to finance the budget hence the reason they are taking expensive money from the market.

This month, the government will be auctioning a 1-year bond to raise Kshs. 30 bn for budgetary support. The last time a 1-year bond was issued in Kenya was in January 2012. Given the expensive rates that they are borrowing at, it is prudent that the government issues short-term debt. Given this week’s auction results where the 364-day T-bill had a market average bid rate of 15.7%, we expect the yields on the 1-year bond to be high, at over 15%. We shall be providing a recommendation on the bidding range for the 1-year bond in our next report.

Despite the Central Bank intervening mid-week to mop up liquidity, the Kenyan shilling continued to depreciate against the dollar, losing 0.2% in the week to close at Kshs. 105.4, taking the total YTD loss to 16.2%. In the coming week, we expect the shilling to be under pressure as investors speculate over the possibility of a rate hike in the September 16th US Fed meeting.

The forex reserves for Kenya are currently at 3.98 months, which is still sufficient for Kenya to meet its dollar obligations, however has now fallen below the 4.0 months statutory minimum, the first time this has happened since April 2013, and from 4.85 months of import cover in January 2015. However, key to note is that so far the government has not drawn down from the IMF facility approved at the beginning of the year.

The government’s borrowing programme for the current fiscal year is behind schedule; instead of net borrowing, the government has so far made a net repayment of Kshs. 29.6 bn for the current fiscal year. Consequently, we expect the government to step up domestic borrowing in a bid to raise the Kshs. 219 bn budgeted for the year.

The stepped up domestic borrowing will further result in upward pressure on interest rates, and therefore we continue to maintain our view that investors should be biased towards short-term fixed income instruments due to the uncertainty of the rate environment.

An excerpt of the Cytonn Report