VZCZCXYZ0000
PP RUEHWEB

DE RUEHNR #0581/01 0581246
ZNR UUUUU ZZH
P 271246Z FEB 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4874
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS NAIROBI 000581 
 
SIPDIS 
 
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: WARY INVESTORS PREFER SHORT TERM GOVERNMENT 
SECURITIES 
 
REFS: A) NAIROBI 414, B) NAIROBI 355 
 
¶1.  Summary: Confronted by insufficient demand for five-year bonds 
in the February 14 auction from investors deterred by political 
uncertainty and fears of rising inflation, the Central Bank of Kenya 
(CBK) shifted its strategy and offered a Ksh7 billion bond (over 
$100 million) with a choice of one and ten year terms.  Investors' 
bids oversubscribed the offer at the February 21 auction, with clear 
preference for the one year bonds.  CBK attributed the strong demand 
to high market liquidity, but the principal buyers also cited a 
narrowing of investment options, with Treasury securities preferred 
as generally risk-free.  Interest rate trends are unclear, and it is 
not yet known whether the high demand for public securities reflects 
low demand for financing from the private sector, or reluctance to 
lend to it.  End Summary. 
 
Shift to Short-term Investment Vehicles 
------------------------------------------- 
¶2.  The January 24 and 31 auctions of Treasury bonds and bills by 
the Central Bank of Kenya (CBK)  saw very low  bids, as political 
uncertainty, and the threats of rising inflation, government 
borrowing and higher interest rates made investors wary of 
committing to five-year bonds.  The CBK changed its strategy at the 
February 21 auction, offering a choice of 1-year, zero coupon 
Treasury bonds and 5-year discounted fixed coupon Treasury bond at a 
coupon rate of 9.5 percent totaling Ksh 7.0 billion (about US$100 
million).  The auction attracted bids totaling Ksh 13.2 billion 
(about US$188.6 million), an oversubscription of 180.7%.  Investors 
demonstrated their preference for short term commitments by applying 
for Sh7.9 billion of the one year notes, and Sh5.3 billion of the 10 
year notes.  The offer of Ksh 5.0 billion (about US$50 million) in 
91 and 182-day T-bills was oversubscribed by 87.9%. 
 
¶3.  While CBK attributes the high oversubscription level to high 
market liquidity, principal buyers of the bonds attribute it to a 
narrowing of investment options, with most of them competing for the 
generally risk-free Treasury securities.  The Kenya Revenue 
Authority (KRA) report that it slightly exceeded its January 
collection target of Ksh34.19 billion (about US$488.4 million) and 
the extra Ksh19 billion (about US$271.4 million) brought in from the 
sale of Telkom Kenya in late December also reassured the market 
somewhat. 
 
Political or Economic Reaction? 
--------------------------------- 
¶4.  Investment analysts attribute the huge oversubscription of GOK 
securities to mean either banks or other lending institutions have 
reduced lending to private borrowers pending the outcome of the 
political mediation process, or that there is low demand for loans, 
leaving banks with excess liquidity.  Banks are the single largest 
group of subscribers of GOK securities, accounting for almost half 
of all Treasury bonds and bills issues.  CBK statistics for February 
15 reported banks held 46.3% of all GOK securities floated in the 
market, insurance companies held 12.1%, and state corporations 
10.9%, while other investors including fund managers accounted for 
the other 30.7%.  Peter Wachira, a senior investments manager with 
AIG Investment Company said that investors are currently putting off 
their investment and expansion decisions while observing the 
political negotiations. 
 
Unclear Interest Rates Trends 
----------------------------- 
¶5.  Interest rate trends are conflicting.  Since January 3, the rate 
on 91-day T-bills climbed steadily to peak on February 7 at 7.42%, 
and then declined in the next two weeks to 7.07% on February 21. 
The rate on 182 day bills has fluctuated without a clear trend in 
¶2008.  The 12-week moving average interest rate for 91-day T-bills 
has fluctuated without a clear trend in 2008, while the moving 
average rate for 182-day T-bills rose steadily in the last four 
weeks.  The interest rate on the 10-year discounted fixed rate 
Treasury bond declined by 5 basis points to 11.27%.  But, the 
average interest rate on the 1-year, zero-coupon Treasury bond edged 
up by 36.5 basis points to 8.86%. 
 
¶6.  Paul Mwai at Old Mutual Asset Management believes the rate on 
the 10-year bond does not reflect the inherent risk, and he blames 
the GOK's insistence on paying low interest rates for distorting the 
market, warning it could push institutional investors to look for 
alternative investment opportunities such as offshore accounts and 
bank deposits.  Suntra Investment Bank's Charles Ocholla opined that 
the low demand for the 10-year fixed-rate bond reflected investor 
concerns about rising inflation. 
 
Comment 
 
-------- 
¶7.  Investors are demonstrating their preference for short term 
investments in the current atmosphere of political uncertainty by 
shifting their bids to short term maturity bonds.  The Kenyan 
Treasury is not yet desperate to raise cash, and the CBK is trying 
to hold down interest rates while hoping for a peaceful resolution 
to the current political standoff.  It is not yet clear whether the 
resumed oversubscription of GOK securities indicates a preference 
for risk-free government securities over private sector lending, or 
less demand for loans as business also waits for a resolution to the 
current political crisis.  End comment. 
 
RANNEBERGER