Kenya’s Domestic Borrowing to Remain High as FY 2016/17 Ends

With only two months remaining, Kenya has in this fiscal year, 2016/2017 borrowed heavily domestically than from external sources to ease pressure on domestic interest rates with expectations it will remain high.

Currently, it is ahead of its domestic borrowing target, having borrowed Kshs 385.0 billion against a target of Kshs 271.9 billion (assuming a pro-rated borrowing throughout the financial year of Kshs 294.6 billion budgeted for the full financial year) compared to Kshs 205.8 billion of the budgeted foreign borrowing, representing 44.5 percent of its foreign borrowing target of Kshs 462.3 billion.

November 2016, the Treasury in its budget review said it expected to raise its borrowing from the domestic market for the fiscal year from July to Ksh 294.6 billion from its initial target of Ksh236. 1 billion.

With an overall budget deficit equivalent to 9.3 percent of its gross domestic product being projected to fall to 8.1 percent, while net foreign financing would be halved to Ksh 287.6 billion.

However, due to its low absorption uptake, it expects it to drop to 6.9 percent of GDP according to the Budget Policy Statement for the FY-2016-17.

“This would, therefore, lower the projected fiscal deficit including grants to Ksh 513.2 billion (equivalent to 6.9 percent of GDP) in the FY 2016/17, down from the estimated Ksh 516.3 billion (7.9 percent of GDP) in the FY 2015/16.”

The government’s expenditure for the third quarter of the 2016/17 fiscal year is at Kshs 1.49 Trillion, representing 97.7 percent of the pro-rated target of Kshs 1.53 Trillion, while development expenditure for the third quarter of the 2016/17 fiscal year had an absorption rate of 109.5 percent against 96.2 percent for recurrent expenditure.

Further, the Kenya Revenue Authority (KRA) is expected to miss its overall revenue collection target of Kshs 1.5 tn, having collected Kshs 989.9 bn, representing 64.7 percent of the overall target, over the first 10 months of the fiscal year.

Total revenue in 10 months through April 30 was Sh1.563 trillion, latest Statement of Actual Revenue and Net Exchequer Issues shows. This was Sh 149 billion, or 8.70 percent, off the Sh1.712 trillion target on pro rata basis.

“Overall, the possible budget deficit and the high inflationary environment that we are currently in, create uncertainty in the interest rate environment,” analysts at Cytonn Investments said in their May monthly report.

Last month, Kenya raised Ksh 35.9 billion sales on bonds vs Ksh 40 billion target from -FXD 2/2010/10 and FXD 1/2009/15-, with effective tenors of 3.4 and 7.4 years it floated for budgetary support.

Just like the previous bond auctions held this year, the government did not accept expensive bids, accepting Kshs 20.0 bn out of the Kshs 38.8 bn worth of bids received, translating to an acceptance rate of 51.5 percent,” notes the Cytonn Investments brief.

Central Bank of Kenya (CBK) data shows that most of the increased debt has been borrowed from local banks, which have cut back lending to businesses and individuals since capping of interest rates late last year.

“The yield curve for Government securities remains stable reflecting the predictability in government domestic borrowing,” notes CBK.

Some of the listed Kenyan banks, Diamond Trust Bank, NIC, a Co-operative Bank of Kenya, Equity, StanChart, Housing Finance Group and National  Bank of Kenya have increased their exposure to government securities.

“This could be attributed to the change in loan and deposits pricing framework brought about by the interest rate caps that has made most lenders increase exposure to the risk-free government as opposed to other risky borrowers.”