Kenya Debt Costs Soar as Shilling Drop Stokes Inflation

Kenya’s borrowing costs rose as the government of East Africa’s biggest economy boosts spending to a record and the nation’s currency sinks to a five-month low against the dollar, threatening to spur inflation.

Yields on three-month Treasury bills climbed for the fifth time at an auction today, increasing 57 basis points to 6.86 percent, an eight-week high, the Nairobi-based central bank said in an e-mailed statement. The rate compares with 5.19 percent for South Africa, Africa’s largest economy, and 12.6 percent for Kenya’s neighbor Tanzania.

Treasury Secretary Henry Rotich plans to spend 1.6 trillion shillings ($18 billion) in the fiscal year through June 2014, pushing the budget deficit to 7.9 percent of gross domestic product from 6.5 percent. Kenya’s economy is forecast to expand 6 percent this year, the fastest pace in six years, compared with 4.6 percent in 2012. Kenya created a new tier of government after March elections that formed 47 county governments, while boosting minimum wages by 14 percent from May. The shilling has weakened 1.7 percent this month against the dollar, Africa’s worst performer after Ghana’s cedi.

“Rising public wages, the expanded budget due to new governance structures and a weakening shilling will create inflationary pressures,” Angus Downie, the London-based head of Ecobank Plc’s economic desk, said by phone July 19. Inflation may reach 8.5 percent by year-end, he said, breaching the upper end of government’s target range.

Rates Hold

The central bank’s Monetary Policy Committee, led by Governor Njuguna Ndung’u, retained the benchmark interest rate at 8.5 percent at a meeting on July 9. The central bank has cut the rate from 11 percent since the beginning of the year. Inflation accelerated to 4.9 percent in June from 4.1 percent in the previous month, staying below the government’s objective of 5 percent, plus or minus 2.5 percentage points.

Kenya’s shilling weakened 0.1 percent to 87.40 per dollar as of 5:03 p.m. in Nairobi, for a decline of 1.5 percent this year. The central bank has been selling repurchase agreements and term auction deposits almost daily to drain liquidity from the market and support the currency. Rates on 182-day securities rose for a fourth auction yesterday, increasing 31 basis points to 6.79 percent, the highest since June 5.

Yields on the sixth-month bills may increase to 7.5 percent by the end of the year, John Kamunya, head of research at StratLink Africa Ltd., a risk consultancy based in Nairobi, said by phone on July 17. The shilling will end the year at 88 shillings per dollar, he said.

Upward Trajectory

“The yields will maintain an upward trajectory as the government borrows to meet the large budget deficit,” Kamunya said. Domestic borrowing will decline to 106.7 billion shillings in fiscal 2014 from 165 billion shillings this year, which rose from a target 96 billion shillings because of increased wages for state workers and election spending, the government said.

The world’s largest exporter of black tea may delay the sale of $1 billion of Eurobonds by more than a month to the final quarter to appoint advisers, the National Treasury said July 19. The issuance, which follows similar plans by other African nations including Senegal and Ghana, will be used to fund the deficit and finance the construction of railway and power-generation projects. Rwanda in April became the first East African country to sell a Eurobond, raising $400 million.

The international bond will help ease some of the burden off Treasury bill yields, allowing the government to spread its local borrowing through the fiscal year, Irungu Nyakera, the regional head of East & Southern Africa at London-based Frontier Markets Fund Managers, a unit of Standard Bank Group Ltd., said by phone on July 17. Still, rates on three-month bills will increase to around 7 percent by year-end, he said.

Higher Compensation

Yields on dollar-denominated African debt have jumped 120 basis points to 5.46 percent yesterday, compared with a 107 basis-point increase in emerging-market bonds, JPMorgan Chase & Co. data show. Kenya is rated B1 at Moody’s Investors Services, four levels below investment grade, while South Africa has the third-lowest investment grade.

The central bank accepted all but 250,000 shillings of the 1.39 billion shillings of bids for the 91-day bills after offering 3 billion shillings of the notes, it said. Yields on 364-day bills jumped 89 basis points at an auction yesterday to 9.95 percent, the highest since May 22.

“Investors seeking higher compensation for their funds will put pressure on the yields, which are likely to rise by up to 200 basis points,” Duncan Kinuthia, the head of trading at Nairobi-based Commercial Bank of Africa Ltd., said by phone on July 17, referring to six-month bills. “The central bank will have to offer higher yields to attract higher bids,” Kamunya said.

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