The Central Bank of Kenya (CBK) has invited bids for IFB1/2019/25 (25 years) with a funding target of KES.50Bn.
The National Treasury’s choice of issue (infrastructure bond) and the tenor (25 years) is a deliberate move to lengthen the maturity profile of domestic debt which stood at 4 years and 2 months as the end of the 2017/18 fiscal year in June 2018.
In our February fixed income report titled “A tale of missed targets and revised budgets”, we indicated that the government had revised its total estimated receipts for the 2018/19 fiscal target lower to KES.2.6Tn.
This was largely on account of declining tax and non-tax receipts.
Kenya Gazette (22nd February 2019) further showed that the government had increased its domestic borrowing target for fiscal year 2018/19 by 9.9% to KES.537.5Bn.
The two scenarios support our view that the government will continue borrowing heavily in the domestic debt market also taking advantage of the low interest rate environment to access low cost capital.
IFB’s have historically recorded higher subscription rates than other Kenya Treasury Bonds because of the tax-free incentive translating to higher investment yields.
However, with a tenor of 25 years, the issue might prove to be less appealing to many investor segments due to duration risk associated with long-term papers.
For this reason, we are skeptical that the issue will achieve full subscription and this is the inspiration behind our report title “Longest IFB faces market test”.
We predict the market weighted average and weighted average of accepted bids at 12.50% and 12.45% respectively.
Macro-economic variables will remain relatively stable with inflation expected to range between 3.5%-4.1% on account of declining fuel prices and stable food prices.
The Shilling on the other hand will trade around KES.100-101 levels in the short term supported by strong foreign currency inflows and declining import prices.
Due to this stability we do not expect any surprises in the next Monetary Policy Committee (MPC) meeting which will be held on 27th March 2019. Download Report