Treasury banks on Eurobond funds to cut interest rates

The government is optimistic that interest rates will begin declining this financial year as the impact of the Eurobond money begins to filter into the economy.

This is despite a recent surge in interest rates in the domestic market to double-digit levels, a trend that the Central Bank of Kenya attributed to low maturities of Treasury bills and the absence of maturing Treasury bonds over the period.

This put pressure on interest rates in the local market in the past few weeks.

However, the rates eased marginally last week with the 92-day Treasury bills declining to 11.408 per cent from 11.438 per cent a week earlier.

The rate on the 182-day bill also eased marginally to 11.5 per cent from 11.585 per cent.

EASING PRESSURE

National Treasury Cabinet secretary Mr Henry Rotich, told Smart Company that the impact of the Eurobond money, part of which will be used in efforts to reduce interest rates that have remained high, would soon become apparent.

“The impact will be felt in the financial year 2014/15, where we will see easing of pressure on domestic borrowing,” Mr Rotich said.

Following a successful Eurobond that raised Sh175 billion ($2 billion) from the international market, there were fears among investors that the interest rates on government securities would decline much faster. This saw many investors rush to lock in high rates. 

“The fear of re-pricing partly led investors of government securities to lock in high interest rates at the short end before the government receives Eurobond proceeds,” said officials at the Central Bank in an email response.

ACCESS CREDIT

Analysts indicated that the issuance of the Eurobond and its timing was a deliberate plan to increase liquidity in the domestic market by easing pressure on the Treasury bill auctions.

The analysts, however, indicated that even with the Eurobond money in the bank, it will take time before interest rates go down.

The proceeds from the Eurobond will reduce government’s domestic borrowing to finance its programmes, easing demand for credit from the local market.

This will allow the private sector and other borrowers to access credit from the market without facing competition from the government.

Part of the Eurobond money has already gone into servicing a $600 million syndicated loan the government borrowed from three international banks in 2012.

The Kenya Bankers Association director for the Centre for Research on Financial Markets and Policy, Mr Jared Osoro, said that the logic of the Eurobond’s issuance and timing was that it would improve liquidity in the market by easing pressure at the Treasury bill auctions.

MUTED IN MONEY MARKET

This, he said, would in turn lead to easing of pressure in the domestic market, stimulating reduction in interest rates.

“It is true that Kenya’s successful debut issuance of the Eurobond has engendered sentiments that it will ease pressure on the rates of government securities. Indeed, there are views that it will result in such rates coming down,” Mr Osoro said.

“To the extent that the proceeds from the Eurobond will lower the government’s resort to the domestic market to finance its programmes, the expectations of a reduction in the Treasury bill rates are justified.”

Mr Osoro, however, said unlike the foreign exchange market where future expectations manifest themselves in current market outcomes, “the role of such expectations (of reduced Treasury rates) is muted in the money market”.

REFERENCE RATES

“That partly explains the recent activity in the Treasury bill market where the effect of the successful Eurobond has not been factored in the pricing,” Mr Osoro noted.

He said once the influence of the Eurobond proceeds filters into the money market and is reflected in the Treasury bill rates, there would be obvious effects on the banks’ reference rate.

The inaugural sovereign bond for Kenya was over-subscribed by over 500 per cent.

The government took Sh175 billion ($2.0 billion) of the Sh700 billion ($8.8 billion) on offer at an average interest rate of 6.6 per cent. This was the highest amount attracted in a bond issue of any African country.

“The government, due to this success of entry into the international capital market, will reduce expensive domestic borrowing. This will of necessity release some liquidity into the domestic market,” said Central Bank governor Prof Njuguna Ndung’u.

“For this liquidity to be usefully applied to domestic and regional investments, interest rates on lending will have to decline substantially.”