Fixed Income Report - February 2019 - "A tale of missed targets and a revised budget"
The Central Bank of Kenya (CBK) invites bids for FXD1/2019/5 (5 years) and FXD1/2019/10 (10 Years) with a funding target of KES.50Bn.
We sense a realization by the National Treasury that it is falling short of both revenue and borrowing targets and this in our view will inform an aggressive borrowing strategy in the second half of the 2018/19 fiscal year.
Our report titled “A tale of missed targets and revised budgets” is largely informed by data from the National Treasury showing a downward revision of its fiscal receipts target.
While Tax and Non Tax receipts targets have been revised lower, domestic borrowing targets has been pushed upwards to fill in the deficit gap.
For this reason, we see the Central Bank of Kenya (CBK) issuing more “investor appealing” bonds to ensure high subscription.
This is not to say that the CBK has limited choice as current high market liquidity appears to give it an upper hand when it comes to managing its average cost of domestic debt.
We choose to make conservative predictions for the Weighted Average Rate (WAR) of accepted bids at 11.30% and 12.35% for the 5 and 10 year issues respectively, marginally lower than current yield curve levels because of high market liquidity.
Demand for short and medium term securities will remain high and this supports our view of high subscription for this issue.
The country’s macro-economic variables remain stable with minimal variations from the current inflation and exchange rates in the short term.
These bond issues are the second in the second half of the 2018/19 fiscal year, a period that will also see the treasury tap into the sovereign and commercial debt market to bridge its fiscal deficit gap. Download Report