For Online E-newspaper
The East African : February 3rd 2014
4 SEALING BUDGET DEFICIT Eurobond to help govt cut domestic borrowing and push down lending rates Sove≥eign bond is expected to ease p≥essu≥e on yields on T≥easu≥y secu≥ities and imp≥ove liquidity A JOINT REPORT The EastAfrican T he anticipated issuance of a $2 billion sovereign bond by Kenya is expected to push interest rates further downwards in the coming months as the government cuts domestic borrowing. Treasury Cabinet Secretary Henry Rotich had said that the bond — which he said would be more than $1 billion but not more than $2 billion — would be floated in the first quarter of 2014, which ends next month, with details of the issuance expected in the next few weeks. Latest data from the Central Bank of Kenya shows that overall interest rates have been falling over the past few months, with both deposit and lending rates declining. This has seen interest spreads — the difference between what banks charge borrowers and what they pay depositors for their money — decline, potentially squeezing the industry’s profitability. Kenyan banks largely rely on wide interest spreads to grow their profits and their willingness to cut lending rates is a sign of the pressure they are under to grow their loans by making credit more accessible. The CBK said interest spreads fell to 9.49 per cent in November 2013, from 10.16 per cent in July. But on average, spreads surged in 2013 compared with 2012. The data shows spreads averaged 10.02 in the first eleven months of 2013 compared with 9.98 per cent the previous year. While banks on average cut lending rates, they also slashed the rate they pay depositors to cushion their profitability, the data shows. A cut in lending rates alone would put pressure on the bankers’ margins. The fall in deposit rates is being attributed to increased cash arising from an ongoing economic recovery. Low deposit rates are set to hurt the return of high-net worth investors, especially pension fund managers who two years ago enjoyed an a regime of pricey deposits. “As a result, interest rate spreads are comparably higher in Kenya largely due to comparably lower deposit rates while average lending rates are much higher in Uganda and Tanzania,” says the CBK in a document seen by The EastAfrican. In Uganda, interest spreads stood at 11.70 per cent while in Tanzania, the rates are oscillating around 5.5 per cent, the data shows. The latest survey by CBK’s Monetary Policy Committee shows commercial banks expect lending rates to remain generally stable or decline in 2014 due to a stable macroeconomic environment, increased competition among lenders and the expected issuance of a Eurobond by the country. “Issuance of the sovereign bond is expected to ease pressure on yields on Treasury securities, and improve liquidity conditions with an expected increase in GoK spending,” said the CBK. According to the survey, large banks expect comparably lower average lending rates in 2014 due to comparatively higher liquidity levels and lower cost of funds. But analysts argue that al- though the Eurobond is expected to reduce government appetite for local borrowing, growing spending pressures as well as the pick-up in economic activity could put pressure on interest rates. “The planned Eurobond is- suance could trigger a significant rally in the domestic bond market by the second quarter of this year [April-June] as issuance of local-currency bonds is reduced significantly. However, the recent supplementary budget — and its reliance on additional borrowing rather than spending re-prioritisation for its financing — could see the government issue more bonds,” said Razia Khan, the head of Africa research at Standard Chartered Bank. The government is thought to be favouring a 10-year dollar-denominated Eurobond. With prospects for growth among African countries seen as more robust than their counterparts in Europe (who are pulled down by the debt crisis in the Eurozone), investors have been keen to take up African debt. In April last year, Rwanda is- sued a debut $400 million Eurobond, which was heavily oversubscribed. “The appetite for sub-Saharan The EastAfrican NEWS FEBRUARY 1-7,2014 ELSEWHERE IN AFRICA Rwanda: In April last year, Rwanda issued a debut $400 million Eurobond, which was heavily oversubscribed. The 10-year dollar bond was issued with a 6.875 per cent yield. Nigeria: Nigeria last year issued a $500 million fiveyear bond at a yield of 5.375 per cent and a $500 million 10-year bond with a yield of 6.625 per cent. The two attracted bids worth $1.77 billion and $2.26 billion respectively. The yield on the 10-year bond is less than the seven per cent the West African country paid in 2011 for a similar bond but still lower than what Kenya is offering. sovereign credit continues to grow and as this will be the first flagship issue, I expect it will find good sized demand, probably 15 times oversubscription. I foresee a more nuanced approach after this flagship issue. I believe we will see a lot of assetbacked bonds as Kenya looks to finance the heavy capital intensive infrastructure and energy rollout,” said Aly Khan Satchu, a financial markets analyst and the chief executive of Rich Management. Analysts said the premiums for the bond are likely to be higher than other markets because Kenya seeks to attract huge amounts of funds to fi- UK to double investment in Kenya and By PAUL REDFERN Special Correspondent THE UK government is set to double its economic investment in a number of developing countries, including Kenya and Tanzania, in a key policy shift in its £9 billion ($14.8 billion) aid policy. The move announced by Britain’s Secretary of State for International Development Justine Greening in London is aimed at ending emerging economies’ dependence on aid and marks a shift from traditional priorities such as fighting disease and hunger. The shift comes as other coun- tries, such as Japan and the US rush to link more the aid they provide to poor countries with business opportunities. A key aspect of the new UK policy is the appointment of Novastar, a venture capital fund based in East Africa, who will be the first beneficiary of a CDC-managed fund that will provide capital to promising businesses across the region, which benefit the community. The fund will invest up to £9 mil- lion ($14.8 million) in Novastar to allow it to support more businesses and in East Africa which provide low-cost education, health care, energy, housing and safe water. The Department for International Development (DfID) has already signed its first memorandum of cooperation with the London Stock Exchange Group to support emerging capital markets in Africa. This will allow the LSEG Academy to expand its training in Tanzania and, in time, across East Africa. The UK government will also sign new partnerships with leading British and international companies to improve business conditions in Africa and South Asia, kick-start capital markets and drive more investment into frontier economies. In a keynote speech at the London Stock Exchange, Ms Greening set out the DfID’s new approach to supporting growth and creating jobs in developing countries.
January 27th 2014
February 10th 2014