- The rising fed rates have led to expensive loans as Kenya struggles to curb inflation
- Although global inflation has generally eased, rapid monetary policy tightening in advanced economies has sharply tightened global financial conditions.
- According to the CBK governor, Kenya should brace for a challenging 2024, including tightening global conditions that will cascade to local levels
Kenya is still at risk of bearing the impacts of new global threats like rising fed rates that may emerge in 2024, financial industry sector players have revealed.
In the past year, the country has confronted challenges ranging from the war in Ukraine, the prolonged drought that affected the country, rising federal rates, and high global inflation.
The rising fed rates led to expensive loans as the country struggled to curb inflation, which currently stands at 6.9 per cent.
Financial experts from Standard Chartered project that the rising fed rates will ease from mid this year, signalling that Kenyans will continue to grapple with the tough financial market.
“Dollar outlook and fed rates will play a key role in assessing the credit risk by investors moving forward,” said Standard Chartered, Chief Investment Officer for Africa, Middle East and Europe Manpreet Gill.
He adds that the current high bond yield in many emerging markets will decrease as the markets correct themselves.
“We are telling local investors to be cautious and stay diversified, they should increase the quality of their portfolio because we don’t know what will pop up next,” said Standard Chartered Head of Wealth Management Paul Njoki.
Central Bank Governor Kamau Thugge, in his contribution to a publication titled Forging Ahead: Challenges, opportunities, and Lessons from Kenya’s Experience, says that while the country is on a recovery path, there are still significant challenges to be braced this year.
Although global inflation has generally eased, rapid monetary policy tightening in advanced economies has sharply tightened global financial conditions.
This has been reflected in the prevailing high yields on sovereign bonds and depreciation of domestic currencies against the US dollar and other major currencies
Rising Fed Rates and Tight Monetary Controls
According to the CBK governor, Kenya should brace for a challenging 2024, including tightening global conditions that will cascade to local levels and debt sustainability challenges. And with a bullet payment of $2 billion Eurobond pending CBK, Kenya will have to revisit some of its priorities.
These factors have exacerbated debt sustainability challenges in Sub-Saharan Africa amid tight budgetary constraints and pose a significant risk to inflation.
“Given the limited fiscal space, expenditures toward social sectors, public investment, and safety nets for poor and vulnerable groups have become highly constrained. Additionally, inclusive and sustainably higher growth is needed to effectively address widespread unemployment, particularly among the youth,” said Thugge.
Already Capital market players have raised concerns about the high yields on government papers, saying they are piling unnecessary pressure on an already bloated public debt.
The Association of Pension Trustees and Administrators of Kenya said its members are working on a module that will see domestic capital fuel the growth of public equities in Kenya and shape a prosperous financial landscape.
The debt threat and strict global financial markets have left the government to resort to high-yielding bonds to attract investors into its securities.
Impact of Shilling on Government Securities
The government’s high demand for local debt saw yields on bonds and Treasury Bills rise to an average of 18 per cent and 15 per cent respectively.
Besides, the National Treasury has shortened bonds’ duration, meaning the exchequer could be forced to make higher principal repayments to investors in a shorter time.
According to new data from the Central Bank of Kenya (CBK), the average time to maturity for bonds has shortened to 8.5 years as of June from a higher mean duration of 9.1 years in November 2022.
The Treasury is expected to pay down $2.33 billion in internal domestic debt redemptions- summation of Treasury bonds and bills maturities- from fiscal year to June.