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The East African : Aug 25th 2014
42 MAKING CREDIT MORE AFFORDABLE IN KENYA Banks to lose if govt cuts local borrowing They will fo≥go chances of making about $40.7m if T≥easu≥y bo≥≥owing falls by half By PETERSON THIONG’O The EastAfrican ties for risk-free investments if Treasury follows through on President Uhuru Kenyatta’s pledge to cut domestic borrowing by half in a bid to make credit more affordable. Coming after Kenya’s successful C Eurobond, which raised $2 billion, a further reduction in government appetite for local debt would encourage banks to lend more to the private sector. Kenyan banks are the largest holders of government securities, having 53 per cent of all Treasury debt. If Treasury borrowing fell from Ksh190 billion ($2.14 billion) to Ksh100 billion ($1.13 billion), the banks would — based on the current 91-day T-bill rate of 8.2 per cent — lose opportunities of making revenues of about Ksh3.6 billion ($40.7 million) from new debt. The total stock of domestic debt was Ksh1.32 trillion ($14.9 billion) at the end of July. Although the government may find it difficult to meet its revised borrowing target, analysts say the subsequent drop in yields on stateissued securities would encourage banks to lower interest rates. Banks use yields on T-bills as benchmarks in pricing money but this will now be moderated by the Central Bank Rate following the introduction of a standard base for flexible lending — the Kenya Bank Reference Rate (KBRR). “If they manage to cut down on borrowing, we expect interest rates to fall, which will result in cheaper lending costs as well as a rise in the equity market,” said Parshv Shah, an investment analyst at AIB capital. President Kenyatta said on the eve of the US-Africa Summit that the government aimed to reduce ommercial banks in Kenya face a drastic decline in opportuni- The EastAfrican BUSINESS AUGUST 23-29,2014 FDI into Uganda up 24pc By BERNARD BUSUULWA The EastAfrican FOREIGN DIRECT investment into Uganda grew by 14 per cent to $1.154 billion in 2013/14 from the previous financial year, according to data from the country’s central bank. The growth was supported mainly by rising investor interest in the mining and manufacturing sectors, observers said. “The government’s investment promotion efforts are beginning to pay off, resulting in new large investments,” said Frank Sebbowa, the executive director of the Uganda Investment Authority. Dr Sebbowa said the mining Customers in a banking hall in Nairobi. Picture: File its borrowing through Treasury papers from Ksh190 billion to Ksh100 billion this fiscal year. “The extra supply of cash will, therefore, hopefully help to bring down bank lending rates to the productive sectors of the economy,” said President Kenyatta. According to the 2014/15 budg- et, Kenya has a funding deficit of Ksh340 billion ($3.84 billion), which is expected to be bridged through domestic and international borrowing. “We expect a decline in yields in the short term. This may accelerate once the Treasury executes its strategy of a reduction in domestic borrowing. We advocate a buy and hold strategy to ensure the investor rides the wave and extends his portfolio tenor,” said analysts at Sterling Capital, a Nairobi based brokerage and investment firm. Broad economic trends such as inflation and exchange rates are $1.13m By A SPECIAL CORRESPONDENT Xinhua RAIL FREIGHT tariffs in the East African Community are higher than in any other region of the world, a new survey shows. The 2014 East Africa Logistics Performance Survey notes that this is due to the lack of effective concession agreements as well as the inability by operators to invest in improving efficiency. “A well developed railway system would be the best solution to reducing transport costs,” said Gilbert Langat, the chief executive of the Shippers Council of East Africa. “The region must, therefore, establish clear guidelines to support logistics management for operators Gilbert Langat. Pic: File also expected to have a say in the extent of government borrowing. “We expect the set target to de- pend primarily on inflation. If inflation stabilises, we then expect Treasury to reduce government borrowing. We, however, expect this to be difficult with the increase in food prices due to the poor distribution of rainfall and the increase in energy costs. However, we expect a cut in borrowing in the medium term as inflation stabilises,” said Mr Parshv. In the past few months, inflation has edged up, driven by increased food and energy prices. In July, inflation rate rose to 7.67 per cent, up from 7.39 per cent in June, and analysts say the outlook looks even grimmer. “Going forward, we anticipate in- Expected new value of Treasury borrowing from the current $2.14 billion following the planned cut flation to remain above the National Treasury upper band of 7.50 per cent possibly approaching the eight per cent level. This will largely be driven by high electricity costs and increased probability of higher oil prices as renewed violence in Iraq and Libya poses a threat,” said Sterling Capital. A rise in inflation past the gov- ernment upper target of 7.50 per cent could push the country’s Mon- BACKGROUND President Uhuru Kenyatta said on the eve of the US-Africa Summit, that the government aimed to reduce its borrowing through Treasury papers from Ksh190 billion ($2.14 billion) planned in the budget to Ksh100 billion ($1.13 billion) this fiscal year. The figures are based on the current 91-day T-bill rate of 8.2 per cent. According to analysts, the subsequent drop in yields on state- issued securities would encourage banks to lower interest rates. etary Policy Committee to tighten the rate at which the Central Bank lends to the banking sector. The MPC meets later this month. “The output of the formula points out the possibility of an increase in the CBR to a target range of 8.75 per cent and 9.50 per cent this year. The decision will largely revolve around inflationary pressure rather than stimulating GDP. That is, the MPC will be more concerned about taming inflation rather than stimulating the economy,” said Sterling Capital. EAC ≥ail f≥eight cha≥ges highe≥ than global ave≥age and intermediaries.” He said that govern- ments need to invest in transport infrastructure, which will in turn boost international trade. He urged EAC member states to eliminate delays while goods are in transit in order to boost the bloc’s ability to com- pete effectively in the global economy. Humphrey Kisembe, an economist who was part of the study, said that one of the biggest challenges affecting the freight industry is the lack of transparent charges. “The imposition of surcharges has affect- ed the competitiveness of the sector,” said Mr Kisembe said, adding that the lack of access to credit had contributed to the underdevelopment of small and medium size enterprises as providers of logistics services. Mr Kisembe said the average truck in the EAC covers 5,000-7,500km per month compared with the international average of 12,000 km. “This shows that transport corridors have inefficiencies such as delays at Customs and weighbridges,” he said. Kenya’s Transport Principal Secretary Nduva Muli said laws governing the railway sector are being reviewed with the aim of spurring new investments. sector has attracted new Chinese and Turkish players who are interested in the commercial production of minerals. Targeted minerals include gold, iron ore, marble, gemstones and copper. The Sukuru Phosphate Project in Tororo district in eastern Uganda stands out as the most ambitious investment in the nonoil and gas segment. The project is valued at $620 million, and is funded by the Guangzhou Dongsong Energy Group of China. Challenges In contrast, delays in approv- ing field development plans submitted by the three major oil exploration firms in Uganda, and the government’s reluctance to issue licences for the second exploration round are likely to slow down new investments in the oil and gas segment this financial year, sources argue. However, senior executives in the oil and gas industry expect that key financing agreements for commercial production will be completed before the end of 2015. “The exploration and appraisal stages have been completed and we are currently preparing for field development operations,” said a senior manager at Tullow Oil Uganda who requested anonymity. Large projects in the manufac- turing sector are dominated by cement producers. So far, three new plants are under construction in eastern Uganda with foreign investors targeting a surge in demand for cement and other building materials expected from the start of physical works on the $1.4 billion Karuma hydropower dam and the 183MW Isimba hydropower dam. “While big investors from Europe have focused on capital intensive projects in the mining and manufacturing sectors, investors from Asia have concentrated more on service related businesses. However, parliament’s frequent bickering over business issues has proved a disincentive to investor confidence,” said Patrick Mweheire, executive director at Stanbic Uganda.
Sep 1st 2014
Aug 18th 2014