During August auction, government reopened two infrastructure bonds earmarked for financing infrastructure projects in the current fiscal cycle.
- Government received bids worth KSh 126.3 billion against KSh 50 billion on offer – a 252 percent oversubscription- and accepted bids worth KSh 88.7 billion reflecting a 70.2 percent acceptance rate.
- Demand was skewed towards the shorter term 6.5 year paper, having a 193.7 percent oversubscription with investors keen on hedging against duration risk maintaining the watch-and-wait approach towards government securities.
- 17 year paper on the other hand was undersubscribed, recording a 58.9 percent subscription rate, receiving bids worth KSh 29.5 billion.
Investors have continuously exhibited preference for short term papers, compelling the exchequer to slow down on issuing longer dated securities and opting for attractive infrastructure bonds (IFBs).
Notably, IFB1/2023/17 was first issued in March 2023, followed by two subsequent reopening’s within five weeks which remained undersubscribed. Contrastingly, IFB1/2023/6.5 was opened in November and subsequently reopened in December – all receiving bids above offered amount.
The weighted average rate of accepted bids stood at 17.73 percent and 18.29 percent for the 17 year and 6.5 year paper respectively. Investors have continuously been seeking higher returns to maximize their real yields whilst government keen on lowering debt costs by rejecting aggressive bids.
The auction followed Moody’s and Fitch Ratings downgrades, which pushed Kenya further into junk status after the Finance Bill 2024 was withdrawn due to deadly protests and tight liquidity. The downgrade makes it harder for government to borrow from external sources and more expensive to repay existing debt.
This tap sale was designed to attract foreign investment to stabilize the shilling, which had weakened due to severe protests that heightened investor concerns.
In February, government, in the debut of IFB/2024/8.5, received bids worth KSh 288.6 billion against the KSh 70 billion on offer – a 412.4 oversubscription.
“There’s been significant foreign interest in the infrastructure bond, and we anticipate this will also bring in foreign exchange from these purchases,” said CBK Governor Dr. Kamau Thugge, shortly after the bond’s February issuance.
The shilling took an upswing from February, underscoring the IFBs role in foreign inflows and a gauge for investor confidence.
Consequent to recent twin tap sale, the shilling has since stabilized to KSh 129.2 today from KSh 132.2 when it was floated. Foreign exchange reserves have also held up, closing last week at US$ 7,340 mirroring the increased dollar inflows.
The ever growing appetite for infrastructure bonds(IFB) point to tax free nature of returns of Kenyan IFBs and prevailing high yields.
The new Finance Minister has hinted on reviving some clauses of the dumped Finance Bill 2024 amid growing concerns regarding budget deficit – about 4.2 percent of GDP – in the 2024/25 fiscal year. Kenya’s current debt is at 74 percent of the country’s GDP.
“Our team is already working on some of those proposals that were in the Finance Bill 2024, which we can now put together and take back to parliament, not as a Finance Bill, but as other proposals,” said new Treasury Cabinet Secretary, John Mbadi.
While speaking on Monetary policy brief last week, Central Bank governor Dr. Kamau Thugge soft-pedaled concerns over increased domestic borrowing, noting it was early in the financial year, and that even the revised borrowing target was lower than the previous financial year.
“I don’t see any reason why we won’t meet our domestic financing requirements” he said.
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