No doubt, the Coronavirus pandemic has presented governments with fragile fiscal positions with a considerable policy dilemma.
The need for “one-off spending” to minimize the health and economic damages from the pandemic amidst widening revenue gaps has meant increasing debt levels to levels that may make a post-Covid-19 recovery slow and painful.
Faced with the said difficult but necessary balancing act, the government has increased its debt appetite to finance the much-needed health and social spend as well as incentives to sustain for businesses and households during the crisis.
To be sure, the government has gradually raised its net domestic borrowing target from an initial target of KES 283.50Bn (2.60% of GDP) to the KES 389.70Bn (3.60% of GDP) with 90% of the incremental value coming in the wake of COVID-19 outbreak.
Moreover, with tighter global markets external debt substitution could see an increased reliance on local capital markets for deficit financing. This comes as debt servicing rises in line with the government’s debt maturity profile and US dollar appreciation against the Kenya shilling.
While government papers have offered risk-averse investors with a favorable investment option, there are growing tradeoffs between the search for yield and mounting liquidity concerns.
This has seen reduced demand for T-bills in the last four weeks although this may be skewed with the heavy subscription for the infrastructure bond in the month. The paper raised about KES 70Bn in two sales.
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Investors are becoming increasingly selective in their portfolio choices as capital preservation takes precedence during these uncertain times.
Besides an increased premium on liquidity, the investment horizon may significantly shorten to minimize losses from the ongoing crisis, whose duration remains uncertain.
This may be exacerbated by talk of suspension of interest payments on government securities. While desperate times may warrant desperate measures, such a move may significantly impair the sovereign’s risk profile, increasing the demanded premium.
NCBA Research Team : Faith Atiti and Stephanie Kimani
