State borrowing ahead of target as liquid market boosts bonds uptake

The government’s net domestic borrowing has hit Sh221.4 billion within the first two months of the fiscal year, staying ahead of the pro-rated target as a high liquid market supports lending to the State.

The government has taken up Sh200 billion from the Treasury bonds floated in the market in the current fiscal year, which include July’s three-tenor paper and a tap sale on a 2018 20-year bond, and the 11-year infrastructure bond whose sale concluded last week.

In the 2020/2021 fiscal year, the government intends to borrow a net of Sh494 billion from the domestic market.

Analysts at investment bank Genghis Capital said the ambitious borrowing over the short period implies the reduced borrowing pressure ahead and a shift to issuance of longer tenor primary bonds.

“At the moment, we estimate net domestic borrowing is ahead of the curve at Sh221.4 billion (or Sh189.6 billion—38.4 percent of financial year target—after offsetting CBK overdraft). As such, domestic borrowing is ahead of the curve and implies reduced borrowing going forward,” Genghis said in a note.

On a pro-rated basis, the State ought to borrow about Sh41.2 billion per month from the domestic market to hit the target at the close of the fiscal year.

However, the Treasury and CBK have in the past few months benefited from a highly liquid money market that has seen bids on government paper hit record highs, and in turn pushed yields lower.

The prevailing conditions have therefore favoured front loading on domestic debt to take advantage of the cheaper money on offer from investors.

The same level of appetite has been seen on the short term Treasury bills, which in mid-July saw weekly bids go as high as Sh85 billion against a target of Sh24 billion on the three tenors combined.