Bloomberg News

Kenya Yield to Rise to 9-Year High on Price, Bank of Africa Says

June 03, 2011

June 3 (Bloomberg) -- Kenya’s three-month borrowing costs are poised to climb to the highest in more than nine years by the end of the year as inflation in East Africa’s biggest economy quickens, according to Bank of Africa.

Inflation accelerated to a 25-month high of 13 percent in May as fuel and food prices rose in line with surging global commodity costs. The Central Bank of Kenya, which targets inflation of five percent, has raised the key lending rate to 6.25 percent and raised the cash reserve ratio to 4.75 percent to curb price growth. Cooling inflation is among the nation’s key priorities, Domenico Fanizza, the International Monetary Fund mission chief in Kenya, said May 24.

Yields on Kenya’s 91-day treasury bills increased to 8.798 percent at yesterday’s auction of the debt, the highest since May 2002, compared with 7.942 percent at last week’s sale, according to data compiled by Bloomberg.

“If inflation rises to as much as 18 percent, the yield could rise to 10 percent by December,” Kennedy Butiko, deputy head of treasury at Bank of Africa, said by phone from the capital, Nairobi. The bill’s yield was last above 10 percent in April 2002, according to data compiled by Bloomberg.

Inflation should peak at 17 percent by mid-year, driving bond yields higher over the next few months, before price growth eases in the second half of 2011, Yvonne Mhango, sub-Saharan Africa economist at Johannesburg-based Renaissance BJM, said by phone today.

Spending, Deficit Funding

Kenya plans to increase spending by 16 percent to 1.16 trillion shillings ($13.3 billion) in the next fiscal year through June 2012 as investment on roads and power expands, Finance Minister Uhuru Kenyatta said yesterday. Expenditure on infrastructure in the budget will jump about 35 percent to 221 billion shillings from a year earlier. Kenyatta is due to give his annual budget speech in parliament on June 8.

Kenya’s third-quarter revenue collection was 7.3 percent below target, according to the Finance Ministry. Planned government borrowing rose to 125 billion shillings in the current year through June, from an original estimate of 105 billion shillings, to fund implementation of a constitution enacted in August and cope with drought, Kenyatta said March 23.

“With government spending going up, they may need to issue more papers to fund the deficit and let the free market operate," Zul Butt, head of treasury for southern and eastern Africa at Citigroup Inc., said by phone from Johannesburg today.

--With assistance from Chris Kay in London. Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net


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