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Government Borrowing in FY24/25: A Closer Look at Progress And Market Dynamics

BY Soko Directory Team · January 13, 2025 12:01 pm

As of the latest data, the Kenyan Government is ahead of its domestic borrowing curve by 4.2%. Total borrowing now stands at KES 425.37 billion, exceeding the prorated target of KES 408.41 billion for this period.

Breaking Down the Numbers

Excluding Treasury Bills (T-bills), the government’s domestic borrowing performance appears even more impressive. Borrowing in this category is currently 24.5% above the prorated target, reflecting a strategic focus on longer-term debt instruments. This accounts for 69.4% of the overall domestic borrowing target, a clear indication that the government is leveraging domestic debt markets to secure funding.

The Yield Curve and Risk Pricing

The current yield curve paints an insightful picture of market sentiment and risk pricing in Kenya’s fixed-income landscape. As expected in a rising interest rate environment, long-term yields are outpacing short- and medium-term papers, signaling appropriately priced risks over extended maturities.

However, not all segments of the curve have fully adjusted. While short-term papers have largely normalized, medium-term securities remain in the process of aligning with the broader curve dynamics. Over time, these rates are anticipated to converge, ultimately reflecting a more normalized yield curve.

This situation presents a dual implication for the market: on the one hand, it underscores investor preference for higher returns on long-term securities, while on the other, it highlights the gradual recalibration of medium-term instruments to match market expectations.

Recent Movements in Government Security Yields

Recent trends in government security yields add another layer of complexity to the borrowing landscape. Week-on-week data reveals that yields on government securities recorded an average decline of 0.38 basis points (bps). This decline was somewhat offset by an increase of 45bps in yields for securities with an effective tenor of eight years, signaling some volatility in the medium-term segment.

The fluctuations in yields, especially for medium-term securities, are indicative of ongoing adjustments as the market seeks to balance risk and return across different maturities. This trend may also reflect shifting investor sentiment, influenced by macroeconomic factors such as inflation expectations, fiscal policies, and global economic conditions.

Outlook and Implications

Looking ahead, the government’s domestic borrowing strategy appears robust, with a clear focus on aligning borrowing with market dynamics while managing risks effectively. The progress made so far, coupled with a responsive yield curve, suggests a stable borrowing environment for the remainder of the fiscal year.

For investors, the evolving yield curve presents opportunities to navigate varying maturities strategically, balancing short-term liquidity needs against the higher returns available in long-term securities. As the fiscal year unfolds, continuous monitoring of borrowing trends and yield movements will be critical in understanding the broader implications for Kenya’s economic stability and investment landscape.

In summary, the Kenyan government’s proactive approach to domestic borrowing and the market’s response highlight a maturing debt management framework. While challenges such as aligning medium-term yields persist, the overall trajectory remains positive, setting a strong foundation for fiscal sustainability in FY24/25.

Read Also: Kenya Is Struggling With Debt As Modest Revenue Is Collected With Limited Development Investment

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

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