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The East African : Oct 17th 2015
The EastAfrican NEWS OCTOBER 17-23,2015 RUNNING ON EMPTY Kenya runs out of cash, interest rates shoot up T≥easu≥y has also hinted at mo≥e exte≥nal bo≥≥owing, a move it said will lowe≥ inte≥est ≥ates By ALLAN OLINGO The EastAfrican K enya has resorted to borrowing a syndicated loan of $750 million from the international market in an attempt to lower interest rates, which have increased the cost of borrowing locally. The National Treasury hopes that the loan, arranged through CFC Stanbic, Standard Chartered and Citi Bank, will plug the $6 billion deficit in the budget, which has been made worse by missed revenue collection targets. On a positive note, the Kenya shilling has recovered, gaining slightly against the dollar to trade at 103.2 against the dollar on Friday, up from 105.1 in midAugust. However, the cost of borrowing locally hit the roof, with yields on Treasury bills jumping to 21 per cent in last week’s auction, after the central bank embarked on a tightening stance in a bid to cushion the shilling. The yields are now at a three and a half year high. The National Treasury, in a submission made by Cabinet Secretary Henry Rotich to Parliament’s Budget Cthe country is facing a cash crunch, but was confident that the situation would soon improve. Mr Rotich told the commit- tee that the current crunch was occasioned by a combination of domestic and international loan repayments due anytime now, missed revenue targets and demands for disbursements for the everyday running of the central and county governments. Treasury Principle Secretary Kamau Thugge said that the country was expecting the syndicated loan next week and that it was hoped it will reduce interest rates. Treasury has also hinted at more external borrowing, a move it said will lower interest rates in the domestic market. “We have been working with various banks on this loan for a while. It is our hope that we will get a very reasonable rate on it. It is good compared with domestic borrowing,” Mr Thugge said, adding; “We are keen on reducing the cost of borrowing. This will be done through more external borrowing. As it is, it’s too expensive for us to borrow locally.” It is expected that the pric- ing of the syndicated loan will not be more than three per cent above the Libor, (the London Inter bank’s Rate benchmark rate at which leading banks charge each other for short-term loans). The government has also in- dicated that it will be offering a one-year Treasury bond for up to $200 million at its monthly auction next week. In the 2015/16 budget, Mr Rotich set the fiscal deficit at $5.54 THE EFFECTS In last week’s auction, the weighted average yield on the 364-day Treasury bills rose to 21.4 per cent, from 20.6 per cent the previous week. The 182-day Treasury bill saw its yield rise to 21.6 per cent from 20.3 per cent, with the 91-day Treasury bill yield increasing to 21.3 per cent from 20.6 per cent a week earlier. 5 dividual bank’s premium factor and the cost of credit. Analysts however feel that the current borrowing rates are not sustainable and will have an adverse effect on the economy. “We are worried by the effects of these yields on the economy. It’s not a perfect picture. It’s going to be a tough balance, how they manage the rates,” Mercyline Gatebi, an analyst at Genghis Capital Ltd said. “I do not know how the syndi- Treasury CS Henry Rotich, right. The National Treasury has been under public pressure to explain why the government cannot meet its financial obligations. Picture: File We are keen on reducing the cost of borrowing.” Treasury Principle Secretary, Kamau Thugge billion, of which $2.2 billion was to be borrowed locally and $3.4 trillion externally. According to latest Central Bank of Kenya data, the government’s domestic debt stands at $13.8 billion, which represents a reduction of $250 million from the $14.1 trillion at the beginning of the fiscal year in July. In the first quarter of this financial year, Kenya spent $1.32 billion to service its debts. Analysts are warning that the yields in these short term bonds could rise to 25 per cent, which will have a negative effect on the economy, even as the central bank fights to cushion the shilling. In last week’s auction, the weighted average yield on the 364-day Treasury bills rose to 21.4 per cent, from 20.6 per cent the previous week. The 182-day Treasury bill saw its yield rise to 21.6 per cent from 20.3 per cent, with the 91-day Treasury bill yield increasing to 21.3 per cent from 20.6 per cent a week earlier. On the flipside, the cost of credit is rising with banks either cancelling or reducing overdraft facilities to their clients. The interest rates are also set to go up, even as some commercial banks are slowly adjusting repayments for some clients. Currently, banks are charging borrowers an average of 15.26 per cent before adding their risk premium which pushes the rates to more than 20 per cent. Kenya Bankers Association chief executive Habil Olaka said that the banks’ decision to raise the rates will be driven by an in- cate loan will be structured because the commercial banks are the ones driving the domestic rates up. The government could have exceeded estimates on development and on the recurrent expenditure. It’s high time it reorganises its estimates to avoid getting into the current financial position they are in,” Ms Gatebi said. Daniel Kuyoh, an analyst at Alpha Africa Asset Managers, said that on the forex market, the shilling was gaining because of the tight liquidity and rising yields in government securities. “However, as much as the shil- ling is gaining, the expected rise in rates will have a counter-acting effect on the money market and eventually the growth figures,” he said. “I am not sure we are in a position to issue another Eurobond. The government hasn’t indicated that so it could be looking at other sources like the African Development Bank or the International Monetary Fund for loans,” Ms Gatebi said. Impe≥ial Bank woes o≠e≥ a test fo≥ ≥egional financial integ≥ation By BERNARD BUSUULWA The EastAfrican THE CLOSURE of Imperial Bank Ltd by the Central Bank of Kenya and the takeover of its subsidiary in Uganda by the Bank of Uganda, have brought to light the issue of oversight in regional financial integration and how it can affect investor and depositor confidence in small cross-border banks in the region. CBK closed Imperial Bank on Oc- tober 13, citing unsafe and unsound business conditions surrounding its operations. Following CBK’s move, BoU announced it was taking over Imperial Bank Uganda’s operations on the same day, in an attempt to minimise risks of fraudulent transfer of capital between the two insti- tutions. “Bank of Uganda has taken control of operations at Imperial Bank following suspension of its parent institution’s licence in Kenya. Our intention is to make sure that any effects of the Central Bank of Kenya’s actions against Imperial Bank Uganda are stopped,” said BoU Governor Emmanuel Tumusiime-Mutebile. Top managers at Imperial Bank Uganda were not available for comment by press time. Imperial Bank Uganda Ltd, with five branches, started operations in 2011, and registered a net loss of Ush1.9 billion ($514,263) in 2013, compared with a net loss of Ush1.8 billion ($479,072) recorded in 2012, according to company data. Industry sources estimate the bank’s market share at less than two per cent, compared with its parent institution in Kenya, which is ranked in the top 20 banks nationally. Although the intervention by CBK and BoU impressed players in Uganda’s banking industry, hard questions over the regulators’ ability to tackle future cases of failed cross-border banks remain. For instance, differences in regulatory environments could present challenges when it comes to winding up “BoU has taken control of operations at Imperial Bank following suspension of its licence in Kenya.” Governor of the BoU, Emmanuel Tumusiime-Mutebile troubled lenders with cross-border operations. Industry players cite transaction- al costs for winding up failed banks in Uganda, which are deemed exorbitant. BoU spent more than Ush200 billion ($54 million) on the dissolution of local banks shut down in the late 1990s. The banks included Greenland Bank, International Credit Bank and Co-operative Bank Uganda Ltd. This is partly responsible for BoU’s reluctance to execute outright bank closures in the recent past, as in the case of the former Global Trust Bank Ltd, opting instead to transfer assets and liabilities of troubled banks to stronger local rivals to facilitate seamless access to banking services for affected depositors. The bank’s li- cence was cancelled in July last year and its assets and liabilities, including certain branches, were acquired by DFCU Bank Ltd, a bank listed on the Uganda Securities Exchange. Variations in the size of depositor protection funds in each country also have a bearing when it comes to in winding up the operations of a failed cross-border bank. Official data shows that while Uganda’s deposit protection fund was valued at Ush224 billion ($60 million) as at December 31, 2014, the value of Kenya’s equivalent was 7.3 times bigger, at Ksh46.6 billion ($443.9 million) as of June 30, 2014. The value of the deposit protec- tion funds determines how quickly central banks can satisfy depositors’ demands when a bank fails.
Oct 10th 2015
Oct 24th 2015