Treasury ups domestic debt target to Sh300 billion

The Treasury has raised the domestic borrowing target for the current financial year that started in July by Sh16.8 billion, hinting at a possible shortfall in projected tax revenue.

Acting Treasury Secretary Ukur Yatani has in a gazette notice increased to Sh300.31 billion the fresh debt to be borrowed from domestic investors, which is 5.9 percent more than the Sh283.5 billion read in the June 13 Budget Statement by then Treasury CS Henry Rotich.

The Treasury is facing a lower debt repayment burden this fiscal year with domestic maturities projected at about Sh122.58 billion, 44.37 percent less than the Sh220.4 billion that matured in the year ended June 2019.

“It is currently not yet clear what drove the upward adjustment,” Standard Investment Bank (SIB) said in a note sent out to investors Tuesday.

The government ordinarily raises its borrowing targets to plug shortfalls in tax receipts.

“In spite of the upward adjustment in domestic borrowing, we still think yields on government paper will maintain a downward trajectory,” added the SIB note.

Average interest on domestic government debt has been trending lower this year due to increased liquidity in the market, which some have attributed to the ongoing demonetisation of the old Sh1,000 notes with the October 1 deadline fast approaching.

Most commercial banks slowed down lending to businesses and households after enforcement of legal ceilings on interest rates in September 2016, leaving them with increased cash stocks for investment in risk-free government debt.

The Treasury has set a tax collection target of nearly Sh1.81 trillion this financial year for the Kenya Revenue Authority (KRA) – Sh370 billion, or 25.69 percent, more than Sh1.44 trillion collected in the year through June 2019.

This means the KRA is expected to net Sh150.64 billion a month on average to hit the full-year revenue goal, with collections in July standing at Sh107.87 billion. The Treasury will be encouraged to borrow by current reduced interest rates in the domestic debt markets.

Average yields on Treasury bills – which stood at 6.6 percent for three-month, 7.47 percent for six-month and 8.65 percent for one-year paper during last week’s auction – were last seen in mid-2013. Average interest on the 10-year Treasury bond, on the other hand, fell to 11.52 percent during auction last week from 12.87 percent in April and 15.04 percent in mid-August 2016.

“I expect the (downward) trend to continue although a lot will also be determined if the rate cap will be adjusted come September or they will keep to the court ruling of one year,” said Kenneth Minjire, the head of securities at Genghis Capital, last month.

“That’s the uncertainty around the market, but, of course, that will be trumped by the amount of unvested funds you are holding. So I expect the trend to continue until we have a clear direction on the rate cap.”

The Treasury has proposed to repeal the capping of interest rates at four percentage points above the Central Bank Rate in the Finance Bill 2019.

The Bill is set to be debated and passed in September when legislators, who shot down a similar move last year, resume sitting after a recess.

The High Court in March declared as unconstitutional Section 33B of the Banking Act, which introduced rate capping but suspended the enforcement of the ruling for 12 months to give Parliament time to amend the law.