Kenya's Borrowing Costs Bear Brunt in Battle to Defend Currency

  • T-bill yields rise above Uganda for first time since July 2014
  • Sterling's Moturi sees yields at record 24% before dropping

Kenya is finding that the price for defending its currency is higher borrowing costs for the government.

Yields on Treasury bills have surged to their highest levels in more than 3 1/2 years as the central bank attempts to entice foreign investors into buying the securities, attracting dollars into the economy and taking shillings out of the system. Rates on Kenya’s 91-day notes last week rose above those of Uganda, a country with a gross capita per income not even half that of its larger neighbor, for the first time since July 2014, according to data compiled by Bloomberg.

“As rates go up, we’re likely to see foreign investors bring money into the market,” Fred Moturi, head of fixed-income at Sterling Investment Bank Ltd., a Nairobi-based brokerage, said by phone. “The Central Bank of Kenya is willing to stomach high rates. It’s all about the shilling, they feel they have room to do this without negatively affecting inflation.”

So far, the efforts are paying off. The currency of East Africa’s largest economy has declined less against the dollar than neighbors Tanzania and Uganda, which have seen their shillings slide more than 20 percent to record lows, as Kenyan policy makers also run down foreign-exchange reserves to defend the currency. The Kenyan shilling dropped 12 percent against the dollar in 2015 as a slump in tourism and agricultural exports cut foreign-exchange earnings and investors shun riskier assets.

Kenya’s central bank has raised its benchmark interest rate by a total of 300 basis points since June to try and stabilize the shilling in a nation that relies on imports for goods ranging from wheat and sugar to cars and fuel. The Monetary Policy Committee led by Governor Patrick Njoroge held the benchmark interest rate at 11.5 percent on Sept. 22 as concerns about growth outweighed inflation risks.

Yields on Kenya’s short-term debt securities may climb as high as 24 percent from about 20 percent before coming down, according to Moturi. The nation’s 91-day securities paid 20.64 percent at an auction on Oct. 1. The shilling weakened 0.4 percent to 103.40 per dollar as of 2:28 p.m. in Nairobi on Wednesday.

The government budgeted to borrow 229.7 billion shillings ($2.2 billion) from the domestic market to help bridge a deficit equal to 8.7 percent of gross domestic product. While there is pressure to fund the shortfall, “borrowing rates are not sustainable,” Faith Atiti, an analyst at CBA Capital Ltd., said by phone from Nairobi.

“Yields, where they are now, messes up the whole economy,” she said. “It’s really paramount that they contain rates for the sake of the economy. If they try to drop the rates aggressively, then that will definitely renew pressure on the shilling.”

President Uhuru Kenyatta’s administration is also paying more to borrow for less than a year than for two or even five years, an anomaly known as an inverted yield curve that signals investors are more concerned about short-term repayment risks than the longer-term economic outlook. Yields on 364-day T-bills jumped 4.4 percentage points to 20.7 percent at a Sept. 30 sale, the highest since February 2012, while two-year notes sold in August were issued at an average of 14.78 percent.

An increase in yields for bonds maturing in two- to five-years may lure foreign investors, although most will probably prefer higher-yielding infrastructure notes because of their tax-free status, Samir Gadio, head of African strategy at Standard Chartered Plc in London, said.

“The authorities may be more reluctant to issue long-dated shilling debt instruments given the sharp rise in domestic funding costs, but will probably tolerate such rate levels at the short end for the time being,” he said. With issuance lagging behind the government’s target, there is an “increasing possibility that the authorities will step up external borrowing to meet their overall financing needs.”

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