VZCZCXYZ0000
PP RUEHWEB

DE RUEHNR #0355/01 0321318
ZNR UUUUU ZZH
P 011318Z FEB 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4533
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS NAIROBI 000355 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/EPS, EEB/IFD/OMA 
DEPT ALSO PASS TO USTR FOR BILL JACKSON 
TREASURY FOR VIRGINIA BRANDON 
COMMERCE FOR BECKY ERKUL 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PGOV KE
SUBJECT: KENYA: GOVERNMENT BORROWING AND COSTS WILL RISE 
 
REFS: A) Nairobi 353    B) NAIROBI 192 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY.  FOR 
INTERNAL USG DISTRIBUTION ONLY. 
 
¶1. (SBU) Summary: Government of Kenya (GOK) officials are trying to 
maintain confidence and prevent financial panic by claiming the 
current crisis will be short-lived and thus will not have a major 
impact on the GOK's revenue, spending, borrowing, or interest rates. 
  However, the bids at the January 24 auction of government 
securities indicate the financial sector expects inflation and 
interest rates to rise as tax revenues decline and the GOK is forced 
to borrow more from the domestic market and/or cut spending.  That 
said, the GOK should be able to meet its financing needs and cover 
the increased cost of borrowing.  End Summary. 
 
GOK Officials Minimize Financial Impact of Crisis 
--------------------------------------------- ---- 
¶2. (U) GOK officials claim that the month-long political crisis, 
which has handcuffed the economy (ref A, Randy's econ collapse 
cable) is a temporary blip, and that inflation, government spending 
and borrowing, and interest rates will not rise significantly. 
Finance Minister Amos Kimunya claimed on January 29 Kenya would 
suffer only a slowdown in economic activity in the first six months, 
not a recession, because Kenya's fundamentals are still sound and a 
solution will be found soon to the political crisis.  Kimunya 
acknowledged the tourism sector would take longer to recover than 
other sectors and that revenue collection would fall below the 
FY07/08 target of Ksh406.9 billion (about $6 billion), but claimed 
the Ksh8 billion (about $118 million) collected in the first half of 
the year, plus the extra Ksh20 billion (about $294 million) 
collected in the privatization of former state-owned telephone 
monopoly Telkom Kenya would cushion the shortfall. 
 
¶3. (U) On January 20, Kenya Revenue Authority (KRA) Commissioner 
General Michael Waweru claimed his agency would meet its FY07/08 tax 
collection target of Ksh410 billion (about $6.3 billion), even 
though the crisis would undermine business confidence and activity. 
The deficit planned for the FY07/08 budget was Ksh109.8 billion 
(about $1.7 billion, 5.3% of GDP), of which Ksh40 billion (about 
$570 million) would be domestic borrowing, Ksh26 billion (about $400 
million) would be funded by privatization proceeds, and Ksh39.8 
billion (about $615 million) would come from donors.  The GOK 
received Ksh 20 billion (about $294 million) more than expected from 
the sale of Telkom Kenya, but another even larger privatization, an 
initial public offer for cellphone giant Safaricom, could be delayed 
past the June 30 end of the fiscal year.  Further, donors are 
reviewing their programs in light of the insecurity and the need for 
politicians to reach some agreement before they can resume business 
as usual.  Neither Waweru nor Kimunya explained how they would 
compensate for the loss of most of the tax revenue from the Ksh65 
billion/year (almost $1 billion) tourism sector. 
 
¶4. (SBU) The GOK officials' optimism about tax revenues ignores the 
dire forecasts from the private sector that the Kenyan economy lost 
tens of billions of shillings in January, and that the losses could 
exceed Ksh200 billion (about $2.86 billion) and 500,000 jobs in the 
first half of the year if no political settlement is reached within 
the next few weeks.  The January 26-28 upsurge in violence and the 
ensuing plunge of the Nairobi Stock Exchange and the shilling also 
demonstrated that risk factors have risen (Ref A). 
 
GOK Borrowing and Interest Rates Will Rise 
------------------------------------------ 
¶5. (U) The GOK is going to face high costs for dealing the crisis, 
including reconstruction assistance for the displaced persons, 
repairs to roads and other public infrastructure, and security. 
Kimunya has announced he will ask Parliament for more money when it 
opens in March to finance security cost overruns, but did not 
explain where the money would come from. 
 
¶6. (SBU) The GOK has difficulty spending its capital budget even 
during normal times, which tends to bring the deficit below the 
budgeted level.  While financial markets assume the GOK is likely to 
maintain fiscal discipline, they also assume it will have to borrow 
more than planned from the local market.  Central Bank of Kenya 
(CBK) Governor Njuguna Ndungu has tried to keep up investor 
confidence in the economy.  Rather than calling a formal emergency 
meeting of Monetary Policy Advisory Committee (MPAC), Ndungu used a 
meeting of the informal market leaders' forum on January 21 to 
insist that economic fundamentals remained intact, that 8% growth 
was still possible in 2008, and to urge big investors to continue to 
buy T-Bills and bonds at previous rates. 
 
¶7. (SBU) However, Ndungu did not convince the financial sector to 
play ball.  Rather than the usual large oversubscription, the 
January 24 auction of Treasury bonds and bills received bids 
covering only 79.8% and 91.4% of the offer respectively.  Such 
under-subscription is unusual.  The government offered 5-year, 
Ksh7.0 billion (about $103 million) Treasury bonds at a coupon rate 
of 9.5% to meet part of the cost of rolling over Treasury bonds 
maturing in the next month.  Treasury received bids totaling only 
Ksh5.58 billion (about $82 million), of which only Ksh4.7 billion 
(about $69 million) were at or below 9.5%.  The average 91-day 
Treasury bills rate edged up by 11.6 basis points during the January 
24 auction to 7.115% while the average 182-day Treasury bills rate 
edged up by 5.7 basis points to 8.089%.  In December, nearly all 
banks were awash with cash, and banks still see government 
securities as a safe investment.  In the wake of January's violence, 
a senior dealer at a major bank confirmed the main players have 
liquidity, expect interest rates to go up, and are waiting for the 
GOK to offer a higher rate. 
 
But the GOK Can Pay 
------------------ 
¶8. (SBU) Even if GOK borrowing and servicing costs rise, the GOK 
should have no problem servicing its short-term debts, domestic or 
foreign.  The CBK reported on January 25 that cumulative government 
expenditure on interest and other charges on domestic debt from July 
1, 2007 to January 18, 2008 increased 16.3% YOY to Ksh21.4 billion 
(about $315 million), but that this represented a small decline to 
10.1% of the GOK's ordinary revenue from the previous year. 
 
Comment 
------- 
¶9. (SBU) GOK officials' cheerleading has not prevented the financial 
sector from recognizing the GOK will have to borrow more than 
planned in 2008 to cover reduced tax revenues and the costs of 
dealing with the crisis. Investors still have confidence the GOK 
will maintain its fairly sound fiscal and monetary policies, even if 
it requires cutting planned development and capital expenditures. 
Investors will continue to buy government securities, but will 
demand higher rates to cover risk and inflation. 
 
RANNEBERGER