Business Daily (Nairobi)
Onchera O'maiko
3 July 2009
opinion
In line with global initiatives to address the economic slowdown, the 2009/2010 budget was essentially a fiscal stimulus package focusing on sectors to address existing regional development imbalances and spur countrywide growth.
The budget focused on key economic sectors including agriculture, tourism, information and communication technologies (ICT), healthcare and education as well as general infrastructure and public works.
It also outlined certain capital market reforms aimed at reducing the cost of doing business, restoring confidence and strategic shifts in public institutions responsible for managing citizens' social welfare.
The budget had a supply side emphasis focused on stimulating the economy through government expenditure at the grassroots level with major emphasis on infrastructure investment.
Given the current economic challenges, the government has opted not to finance the budget by raising taxes, but rather to rationalize wasteful government expenditure and non-priority spending.
The State also anticipates raising additional financing through a 'responsible' borrowing programme.
Government borrowing from the domestic market to finance the budget is widely expected to range between Sh120 billion - Sh200 billion during the current fiscal year.
The key issue as a result becomes the ability of the domestic market to absorb that quantity of debt, and the likely effects this could have on interest rates going forward.
Increased domestic borrowing by the government to finance the budget deficit could however ultimately drive up interest rates.
Government borrowing will definitely increase substantially given both the Treasury's projected borrowing requirements as well as other uncertainties that nature is likely to bring to the fore.
Increased government borrowing in the longer term could, however, 'crowd out' the private sector by putting the government in direct competition with the private sector for finite funding resources.
Business costInterest rate is a major concern for any investor as it directly affects their cost of doing business.
A report of the Central Bank of Kenya indicates that the use of credit in Kenya has increased from 31 per cent in 2006 to 38 per cent in 2009.
Credit extended to the private sector hit 26.7 per cent in March 2009 from 19.8 per cent in a similar period of 2008.
In contrast, growth in credit to the government dropped to 4.7 per cent in the year to March 2009 compared to 16.5 per cent during a corresponding period in 2008.
Net banking credit to the private sector was almost four times that to the Government over a similar period.
At the moment interest rates are expected to remain stable in the short term despite increased government borrowing.
The domestic credit system currently has capacity to absorb the Government's borrowing needs as projected in the 2009/2010 budget without affecting interest rates over the short to medium term.
This is evident by the high liquidity in the banking sector resulting in the decline in the local inter-bank rates.
The average interbank interest rate declined from 4.1 per cent in the week to June 4, 2009 to 3 per cent against increased average interbank volume trades of up to Sh37.3 billion.
Against a backdrop of slower economic growth banks have also adopted a more cautious approach to lending and have increasingly turned to government paper as an alternative to private sector lending.
The oversubscription witnessed in recent Treasury bill auctions (284 per cent subscription as at June 15, 2009) that have seen 91 & 182-day T-bill rates drop to 7.309 per cent and 8.039 per cent respectively attest to the same.
The recent shift in mandates for NSSF, NHIF, New Civil Servants Pension Scheme, Local Authority Pension Funds requiring them to invest in less risky government securities and infrastructure bonds as well as the requirement that the Defined Benefit Schemes maintain 100 per cent funding has effectively given the government a captive audience for its future debt issuance.
The fact that these schemes will now forfeit potentially higher returns available in the equity markets could eventually foster a situation where they only bid for government paper at higher yields. But sensitivity to government opinion will probably limit their room for manoeuvre.
While interest rates will remain relatively stable in the short to medium term, we must remain conscious of the fact that there's an unquantifiable psychological element of perception which could change the interest rates trends going forward.
Political stabilityIn particular, perceptions on Kenya as a country with regard to political stability approaching the 2012 elections as well as the Government's will to implement its development programs could see the investors re-direct their liquidity to other investments.
In this scenario, the government would be forced to offer more attractive interest rates to compel investors to fund its deficit.
The government postponed plans to issue its first Eurobond due to the financial crisis, but if this project is revived it would provide some new external funding and potentially ease some of the worries in local markets.
O'Maiko is general manager, British-American Investments Company.
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