VZCZCXYZ0000
PP RUEHWEB
DE RUEHNR #0581/01 0581246
ZNR UUUUU ZZH
P 271246Z FEB 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4874
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
UNCLAS NAIROBI 000581
SIPDIS
DEPT FOR AF/E, AF/EPS, EEB/IFD/OMA
DEPT ALSO PASS TO USTR FOR BILL JACKSON
TREASURY FOR VIRGINIA BRANDON
COMMERCE FOR BECKY ERKUL
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN PGOV KE
SUBJECT: KENYA: WARY INVESTORS PREFER SHORT TERM GOVERNMENT
SECURITIES
REFS: A) NAIROBI 414, B) NAIROBI 355
1. Summary: Confronted by insufficient demand for five-year bonds
in the February 14 auction from investors deterred by political
uncertainty and fears of rising inflation, the Central Bank of Kenya
(CBK) shifted its strategy and offered a Ksh7 billion bond (over
$100 million) with a choice of one and ten year terms. Investors'
bids oversubscribed the offer at the February 21 auction, with clear
preference for the one year bonds. CBK attributed the strong demand
to high market liquidity, but the principal buyers also cited a
narrowing of investment options, with Treasury securities preferred
as generally risk-free. Interest rate trends are unclear, and it is
not yet known whether the high demand for public securities reflects
low demand for financing from the private sector, or reluctance to
lend to it. End Summary.
Shift to Short-term Investment Vehicles
-------------------------------------------
2. The January 24 and 31 auctions of Treasury bonds and bills by
the Central Bank of Kenya (CBK) saw very low bids, as political
uncertainty, and the threats of rising inflation, government
borrowing and higher interest rates made investors wary of
committing to five-year bonds. The CBK changed its strategy at the
February 21 auction, offering a choice of 1-year, zero coupon
Treasury bonds and 5-year discounted fixed coupon Treasury bond at a
coupon rate of 9.5 percent totaling Ksh 7.0 billion (about US$100
million). The auction attracted bids totaling Ksh 13.2 billion
(about US$188.6 million), an oversubscription of 180.7%. Investors
demonstrated their preference for short term commitments by applying
for Sh7.9 billion of the one year notes, and Sh5.3 billion of the 10
year notes. The offer of Ksh 5.0 billion (about US$50 million) in
91 and 182-day T-bills was oversubscribed by 87.9%.
3. While CBK attributes the high oversubscription level to high
market liquidity, principal buyers of the bonds attribute it to a
narrowing of investment options, with most of them competing for the
generally risk-free Treasury securities. The Kenya Revenue
Authority (KRA) report that it slightly exceeded its January
collection target of Ksh34.19 billion (about US$488.4 million) and
the extra Ksh19 billion (about US$271.4 million) brought in from the
sale of Telkom Kenya in late December also reassured the market
somewhat.
Political or Economic Reaction?
---------------------------------
4. Investment analysts attribute the huge oversubscription of GOK
securities to mean either banks or other lending institutions have
reduced lending to private borrowers pending the outcome of the
political mediation process, or that there is low demand for loans,
leaving banks with excess liquidity. Banks are the single largest
group of subscribers of GOK securities, accounting for almost half
of all Treasury bonds and bills issues. CBK statistics for February
15 reported banks held 46.3% of all GOK securities floated in the
market, insurance companies held 12.1%, and state corporations
10.9%, while other investors including fund managers accounted for
the other 30.7%. Peter Wachira, a senior investments manager with
AIG Investment Company said that investors are currently putting off
their investment and expansion decisions while observing the
political negotiations.
Unclear Interest Rates Trends
-----------------------------
5. Interest rate trends are conflicting. Since January 3, the rate
on 91-day T-bills climbed steadily to peak on February 7 at 7.42%,
and then declined in the next two weeks to 7.07% on February 21.
The rate on 182 day bills has fluctuated without a clear trend in
2008. The 12-week moving average interest rate for 91-day T-bills
has fluctuated without a clear trend in 2008, while the moving
average rate for 182-day T-bills rose steadily in the last four
weeks. The interest rate on the 10-year discounted fixed rate
Treasury bond declined by 5 basis points to 11.27%. But, the
average interest rate on the 1-year, zero-coupon Treasury bond edged
up by 36.5 basis points to 8.86%.
6. Paul Mwai at Old Mutual Asset Management believes the rate on
the 10-year bond does not reflect the inherent risk, and he blames
the GOK's insistence on paying low interest rates for distorting the
market, warning it could push institutional investors to look for
alternative investment opportunities such as offshore accounts and
bank deposits. Suntra Investment Bank's Charles Ocholla opined that
the low demand for the 10-year fixed-rate bond reflected investor
concerns about rising inflation.
Comment
--------
7. Investors are demonstrating their preference for short term
investments in the current atmosphere of political uncertainty by
shifting their bids to short term maturity bonds. The Kenyan
Treasury is not yet desperate to raise cash, and the CBK is trying
to hold down interest rates while hoping for a peaceful resolution
to the current political standoff. It is not yet clear whether the
resumed oversubscription of GOK securities indicates a preference
for risk-free government securities over private sector lending, or
less demand for loans as business also waits for a resolution to the
current political crisis. End comment.
RANNEBERGER