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Kenya Central Bank Seeks Delay in 1-Year Bond Repayment

GBR Team 24/04/2020

The Central Bank of Kenya is in talks with commercial banks to delay redemption of their one-year (364-day) bonds which are due and instead switch to a new short term holding instrument.

This has been occasioned by cash constraints at CBK to meet the maturities that are due next month. A lot of banks have been holding the one-year bonds to maturity and the regulator wants to “smoothen the curve.”

Central Bank of Kenya bosses earlier today held a conference call with heads of Treasuries at different banks seeking to reduce the concentration in the 364-day bond by switching investors to a short-term holding instrument.

Sheila M’Mbijjewe, the deputy-Governor, held the conference call with the bankers accompanied by the new CBK Head of Financial Markets, David Luusa.

“The thing is that it has not been attractive to invest in 81 and 182 day bills given yield has been low,” one Banker told GBR.

“So banks then went big into the 364 day papers mid last year. They are now coming up for maturity and the government wants to hold onto the cash on maturity but introduce another separate instrument to give the cash holders. This instrument is not a bill.”

According to CBK, the same has been done before in Brazil and the exact nature of the holding instrument will be communicated to banks later. But sources indicate CBK is looking at the 2235/91 and the 2236/91 three-month T-bills issued in 2017 and 2018.

But the senior banker who could not be named because of the sensitivity of the matter, felt CBK was signalling to the market to demand higher interest rates.

“They have managed to show treasurers their desperation and that they are short of funds,” he said.

He added that he expects CBK to end up paying higher interest rates when it came to the market to auction government bonds.

The CBK move comes against the backdrop of falling government revenues and a slowed economy during the Coronavirus pandemic.

The National Treasury, according to Business Daily, is running a Sh64billion overdraft at the central bank, a record.

Tax revenues are also reported to be behind targets by Sh180billion. Just this quarter, by lowering the Value Added Tax rate from 16 percent to 14 percent, the government stands to lose Sh50bn in revenue, according to House Budget Committee chair, Kimani Icung’wa.

One investment banker said CBK was essentially defaulting by
moving to avoid the risk of investors choosing to cash-in their bonds on maturity during a cash shortfall.

“Rollovers happen all the time but this time round seems like they can’t afford the risk banks not to roll over,” the investment banker said.

CBK, he said, should not seek to micromanage banks and do their porfolio management for them.

“I suspect that this is illegal,” he said. “If they want to start portfolio management for banks then they should sign an indemnity for banks in case something goes wrong, and underwrite that risk.”

“They are pushing banks to take more risk with lower returns,” he added.