The Treasury is back on track on its domestic borrowing plan for the fiscal year after taking up Sh88.7 billion in August’s oversubscribed infrastructure bond (IFB) sale, which raised investor bids of Sh126.32 billion.
The State is looking to borrow a net of Sh413 billion from the domestic market in the 2024/2025 fiscal year—as per disclosures made by the Central Bank of Kenya (CBK) last week— equating to a prorated monthly target of Sh34.4 billion.
In July, the Treasury struggled to raise new debt locally as investors held back waiting for clarity on the government’s fiscal position following the withdrawal of the Finance Bill 2024 under pressure from youth protestors. The bonds sold in July raised a total of Sh10.3 billion against a target of Sh50 billion.
The poor performance of the July sale saw the government turn to the infrastructure bond for the August issuance, looking to ride on the general popularity of the project bonds to whet investor appetite.
This issuance, which targeted Sh50 billion comprised two reopened papers —a 17-year IFB that it first sold in March 2023 and a 6.5 year IFB first issued in November 2023.
The 6.5-year option raised bids worth Sh96.86 billion, out of which the government took up Sh74.1 billion, while the 17-year option saw bids of Sh29.46 billion, with an acceptance of Sh14.53 billion.
The bonds have a yield of 18.29 percent for the shorter 6.5-year paper and 17.73 percent for the 17-year, with analysts saying that these tax free rates, especially on the shorter duration tranche, were key in attracting the heavy subscription on the bond sale.
“The high subscription could also be a result of high liquidity in the market with the CBK offering Sh140 billion in reverse repos between August 12 and 14, 2024, accepting Sh115.8 billion,” analysts at Sterling Capital said in a note on the bond sale.
“The high rejection rate of the 17-year paper (50.9 percent) increases the possibility of the CBK having a tap sale issue on the same.”
The analysis added that investors were also keen to lock in the higher yields ahead of what is expected to be a gradual decline in interest rates over the medium term following the recent downward revision of the Central Bank Rate from 13 percent to 12.75 percent.
The monetary regulator said last week following the rate review that it is looking at a gradual easing of monetary policy, in line with the global trend.
This follows the stabilisation of the shilling’s exchange rate and the fall in inflation to 4.3 percent, which is in the lower half of the preferred range of five percent plus or minus 2.5 percentage points.
The clarification by the government of its fiscal deficit and borrowing target for the current year has also helped calm the markets, which were unsettled by the shifting proposals that were being floated before the signing of the supplementary appropriations Bill last week.
CBK governor Kamau Thugge said that the government is looking to borrow a total of Sh773 billion, to be financed through domestic borrowing of Sh413 billion and external loans worth Sh360 billion.
The June budget had set a borrowing target of Sh597 billion, but this has been revised upwards to partly cover for the foregone revenue due to the cancellation of the Finance Bill.