Analysts predict Treasury could review its domestic borrowing upward to Sh294.6 billion.
Central Bank of Kenya (CBK) and lenders are locked in a battle over the cost of the country’s internal debt as pressure mounts for the Government to borrow ahead of elections.
A highly placed source at the Central Bank told The Standard the regulator is not willing to bow to the tactic by a cartel of fund managers to bid very highly for Treasury bonds and bills.
CBK has outmanoeuvred the investors by cherry-picking bids that fall within the yield curve and returning to the market with tap sales after rejecting overpriced bids.
A tap sale is a procedure that allows borrowers to sell bonds or other short-term debt instruments from past issues, where the bonds are issued at their original face value, maturity and coupon rate, but sold at the current market price.
In December, CBK had to issue a tap sale on a two-year bond and another tap sale on a Sh30 billion infrastructure bond in March for the February bond issue.
CBK has also cancelled the half-year Treasury-Bill (182 day T-Bill) and a Sh30 billion bond to help plug the budget shortfall in January.
“Some of these people believe that every election cycle, the Government is under intensive pressure to borrow, what the regulator is saying is that it does not work like c lockwork,” said the source.
RIG THE MARKET
The source, privy to details of the auctions, said some of the bids are coordinated to push the rates up since the bidders have “excess liquidity” sitting as idle cash.
This may be in reference to banks, which are left with costly deposits as lending has slowed down to records last seen a decade ago.
After the rate cap was signed into law last year, the banks turned to Government paper, flooding the market and keeping the rates on short-term paper significantly low.
Economists said since Government debt is not liberalised and banks have an opportunity to collude, they will always be tempted to rig the market.
Banks hold 51 per cent of all State domestic debt, according to the latest CBK data, followed by pension firms at 28 per cent and Insurance firms at 7 per cent. Although the Government is ahead of its domestic borrowing for the current fiscal year, having borrowed Sh188.1 billion against a target of Sh163.4 billion, investment firm Cytonn last week pointed out that once the supplementary budget is passed, the Government will be under pressure to borrow.
“It is important to note that the Government is in the process of revising its domestic borrowing target upwards to Sh294.6 billion, which will take the pro-rated borrowing target to Sh209.6 billion, implying that the Government will fall behind its borrowing target,” said Cytonn said in a weekly supplement.
CBK Governor Patrick Njoroge is on record insisting that the State banker will keep discipline to the yield curve, which has taken so long to set.