The interest rates on Treasury bills fell by the sharpest margin in four months last week, signalling lower risk perception on government debt after the Treasury defined this year’s borrowing targets.
Last week’s auction saw the rate on the 91-day T-bill decline by 0.18 percentage points to 15.81 percent (from 15.99 percent), while the 182-day paper’s rate fell to 16.71 percent from 16.85 percent.
This marked the first rate fall on the two papers since the April 15, 2024 auction, when the 91-day rate declined by a percentage point to 15.73 percent and the 182-day by 0.4 percentage points to 16.46 percent.
The 364-day rate, however, remained little changed in last week’s sale at 16.91 percent.
Youth-led protests
The intervening period since the April contraction has seen a stable rise in the rates on the papers, coinciding with a period of fiscal uncertainty due to youth-led protests that led to the withdrawal of the Finance Bill 2024.
Investors thus opted to put their cash in the 91-day tenor as they awaited firm numbers from the government, while also demanding higher rates to cover against risk.
Last week, Central Bank of Kenya (CBK) Governor Kamau Thugge disclosed that the government would be looking to borrow Sh413 billion from the domestic market in the current fiscal year, and Sh360 billion from external lenders.
Budget deficit
The President also assented to the Supplementary Appropriations Bill 2024, which formally cut expenditure for the national government at Sh145 billion, lowering the budget to Sh3.847 trillion.
“Even with the withdrawal of the Finance Bill, because of the expenditure cuts, we are still having a fairly substantial primary balance surplus. Equally important, the projected budget deficit of Sh773 billion only includes domestic borrowing of about Sh413 billion, compared to almost Sh600 billion we borrowed in the previous fiscal year,” said Dr Thugge.
“Under the supplementary budget, therefore, we should be able to reduce domestic borrowing by almost Sh200 billion, which should reduce pressure on Treasury bill rates. The step that the CBK has taken by reducing the base rate (to 12.75 percent from 13 percent should also cut pressure on interest rates going forward” the CBK boss added.
The June budget had set the fiscal deficit—net of grants—at Sh597 billion, out of which the domestic debt market was due to contribute Sh263.2 billion worth of net financing, and external lenders Sh333.8 billion.
The June deficit amounted to 3.3 percent of gross domestic product, but this has now gone up to 4.3 percent following the Supplementary Budget and Appropriations Bill reviews.
There is a risk, however, that the Treasury may struggle to achieve the target of borrowing Sh360 billion from the external market following the move by two global ratings agencies Moody’s and S&P to downgrade Kenya’s sovereign credit rating, which will raise the cost of borrowing from external lenders.
While the Treasury has received substantial concessional financing from the World Bank and the International Monetary Fund (IMF), it will still need commercial financing to fill the funding gap.
Any difficulties in filling the external funding target would see the Treasury turn to the domestic market for more loans, potentially putting renewed pressure on domestic interest rates.