Nervousness among investors over Kenya’s economic and political stability is leading to a significant withdrawal from local debt markets, a trend that is exacerbating the country’s already precarious fiscal situation. Data from the Central Bank of Kenya (CBK) reveals a sharp decline in demand for long-term Treasury bills and bonds, a key component of the government’s domestic borrowing strategy. This comes as President William Ruto’s administration pivots to domestic borrowing after abandoning controversial tax hikes, further straining the national budget.
On August 1, 2024, the government’s latest debt auction highlighted the severity of the situation. The benchmark one-year Treasury bill attracted less than 10% of the expected demand, signaling a lack of investor confidence. This weak demand has complicated and increased the cost of funding for the debt-burdened government, which had already increased its domestic borrowing targets by 42% to 404.6 billion Kenyan shillings ($3.12 billion) following the cancellation of the tax hikes.
Kenneth Minjire, a senior associate for debt and equity at Nairobi-based brokerage AIB-AXYS, voiced concerns that the government’s approach might be unsustainable. “It is going to be a problem, and it feels like they are just kicking the can down the road,” he said, echoing the sentiments of many market observers.
The backdrop to this crisis is the widespread public opposition to the government’s initial plan to raise taxes by 346 billion shillings ($2.67 billion), which sparked protests that left more than 50 people dead. The unrest, which engulfed major urban centers, further eroded investor confidence. During the week of June 24, when the turmoil reached its peak, demand for Kenyan debt instruments plummeted. Investors offered to buy just a third of what the central bank offered in Treasury bills, and the subscription rate for bonds fell to a mere 2.4%.
Prior to the protests, subscription rates were robust, with Treasury bills being subscribed at 94.7% and bonds often being oversubscribed. However, the current instability has shifted the landscape dramatically. Despite the challenges, CBK Governor Kamau Thugge downplayed concerns, stating that it was still early in the financial year and expressing confidence in meeting domestic financing requirements.
However, the Ministry of Finance has been less optimistic. Finance Minister John Mbadi highlighted the unsustainable nature of the current domestic debt levels, which have reached 750 billion shillings, three times the stock of external debt. “We are over-borrowing domestically,” Mbadi stated, although he did not clarify whether he would attempt to reduce the domestic borrowing target.
The consequences of this over-reliance on domestic borrowing are becoming increasingly apparent. The Kenya Bankers Association warned that the withdrawal of the funding bill, along with subsequent credit rating downgrades, could further constrain Kenya’s ability to secure external funding. The country’s Eurobonds have also seen a decline, making future issuances more expensive.
Compounding the fiscal pressures, potential delays in securing International Monetary Fund (IMF) funding are looming. Kenya had secured a staff-level agreement for the seventh review of its $3.6 billion bailout before the protests, but the board has yet to sign off on it. The revised economic repair plan, submitted without the tax hikes, may delay the next $600 million tranche.
As President Ruto grapples with these fiscal challenges, his efforts to balance the budget are being met with mixed results. His initial pledge to cut 346 billion shillings in spending was halved in the final law, leaving Kenya’s financial stability on shaky ground. With ongoing opposition and near-weekly protests against any potential tax increases, the path to achieving fiscal targets has become increasingly challenging. Fitch Ratings recently downgraded Kenya’s credit rating, underscoring the growing risks to the nation’s economic outlook.
