Political heat jolts Kenya’s plan to borrow globally
Business Daily Kenya: The government may increase domestic borrowing to offset political uncertainties ahead of the August General electio...
The government may increase domestic borrowing to offset political uncertainties ahead of the August General election, a move that could adversely affect the country’s rating in global credit market.
According to Cytonn Investment analysts, the government’s intention to float a sovereign bond might prove challenging as it can only be possible at a significant premium (high interest rates).
“This would mean they may end up borrowing more from the domestic market, further crowding out the private sector, which would be negative to the economy,” the Cytonn report notes.
“The country debt levels may continue to deteriorate, increasing from the current 50.3 per cent of GDP, which is above the IMF recommended limit of 50 per cent for frontier markets.” The report notes that domestic borrowing is already past the target set at the beginning of the fiscal year in June, with the government currently having borrowed Sh169.2 billion domestically, against the pro-rated target of Sh158.6 billion.
According to the Quarterly Economic and Budgetary Review released by the Treasury last month, the gross public debt increased by Sh628.3billion from Sh2.94 trillion as at end of September 2015 to Sh3.57 trillion, which is an equivalent to 48 per cent of GDP by 30 September 2016.
This comprises of 48 per cent of external debt and 52 per cent of domestic debt. According to the Teasury Review, the overall increase is attributed to increased external debt due to exchange rate fluctuations, disbursements from external loans and more uptake of domestic debt during the period.
The Cytonn report maintains that the Kenyan shilling will continue being under pressure this year due to a number of reasons, including the strengthening of the of the dollar in the global market and continued infrastructure and real estate investments, which require imported capital goods.
Furthermore, reduced capital inflows into the capital markets due to uncertainty caused by general elections, and reduced forex reserves will strain the shilling further. Currently the reserves stand at Sh731.3 billion equivalent to 4.6 months of import cover.
The report also projects that the government will maintain its expenditure on infrastructure projects. This expenditure will be financed by funds from tax collection (Sh1.5 trillion), domestic borrowing (Sh236.1 billion), foreign borrowing (Sh462.3 billion) and grants of Sh101.6 billion.
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