(Bloomberg) -- Kenya’s local borrowing costs are stuck near the highest in almost a decade as uncertainty over funding options mounts.
Protests over tax hikes sought by the International Monetary Fund turned deadly in June and ultimately forced the government to backtrack. With the latest IMF aid tranche on hold for now, officials are opting instead to boost sales of shilling-denominated bonds, keeping yields on the local debt elevated.
While a surprise interest-rate cut last month has lowered yields across the curve, borrowing costs remain close to the highest since December 2015. Kenya’s 91-day notes yield 700 basis points more than those of Uganda, which has an identical credit score at S&P Global Ratings. Rates on one-year bills are near 17%.
“Local yields and the implied risk premium is a reflection of the uncertainties concerning Kenya’s fiscal prospects, debt trajectory, and governability,” said Gergely Urmossy, an emerging markets strategist at Societe Generale’s London Branch. “It is also an unanswered question as to how much external funding Kenya can raise in the next 6-12 months.”
Kenya’s plans for fiscal consolidation have come under pressure after the controversial bill, which initially included tax hikes, was repealed.
Now the government has revised its 2024/25 budget, cutting expenditures and increasing domestic borrowing to address the growing deficit. But the adjustments haven’t eased market concerns, and questions linger about Kenya’s ability to secure sufficient external funding with IMF discussions on a potential $600 million disbursement postponed.
Kenya Widens Budget Deficit Second Time in Revised Spending Plan
While Urmossy said the IMF will likely continue to provide support, he predicted more delays in the future.
“Both the IMF and the Kenyan government need to go back to the drawing board and come up with a new plan, which simultaneously addresses fiscal risks, while it is also palatable to the electorate,” he said. “The question is what taxes can be raised, and/or expenditures cut back, without stoking further social discontent.”
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