Kenya risks liquidity problems due to the falling capacity of commercial banks to continue financing the large budget deficit with the removal of the rate cap also likely raising borrowing costs for the Treasury.
Moody’s said in its 2020 outlook on Africa Treasuries that the borrowing cost will go up should the government fail to reduce its fiscal deficit, with banks already demanding higher yields in new lending to government given that customer lending is once again competitive due to the rate-cap repeal.
Commercial banks hold Sh1.57 trillion worth of government debt, equivalent to 54.06 percent of the State’s total domestic debt that stands at Sh2.9 trillion.
“Domestic banks’ capacity and willingness to purchase government securities influence the liquidity conditions sovereigns face, particularly those with constrained or unreliable access to external financing,” said Moody’s.
“Liquidity risks are material in Kenya (and Ghana) due to a combination of the governments’ large gross borrowing requirements, the already large share of government securities held by domestic banks, and slow deposit growth, which constrain banks’ capacity to absorb future government financing needs.”
In the current fiscal year, Kenya’s fiscal deficit stands at Sh640.2 billion, to be financed on net basis through Sh305.7 billion in domestic borrowing, Sh331.3 billion in external loans and Sh3.2 billion in other domestic borrowing.
The World Bank warned last October that maturities of domestic debt it estimated at Sh1.2 trillion by September 2020 (41 percent of current outstanding domestic debt) would exert pressure on tax collections.
“The government could face challenges in rolling over such bonds in an environment of no interest rate caps, low subscription rates and overexposure of commercial banks to these assets,” the Bank said.
Fund manager ICEA Lion Asset Management said in outlook for 2020 this week they anticipate yields on government securities will go up by between 100 and 150 basis points this year.
“Since the repeal of the rate cap, interest rates on treasury bills and treasury bonds have risen by almost one percentage point in some instances,” said the firm’s head of research Judd Murigi.
“Upward pressure on interest rates is expected to persist in 2020 as the government faces renewed competition from the private sector for bank funding…we expect interest rates on treasury bills and bonds to increase by at least 100 basis points in 2020.”