The Government raises Sh82 billion from infrastructure bonds but the bond market remains shallow

By Joseph Kinyua

The ability of governments to mobilize resources to achieve development objectives depends on the capacity to mobilize both short and long term financial resources for investment and sustained economic growth. 

Bond markets provide an important source of such funding and therefore, in many countries, development of vibrant bond market is often a key government objective.

In Kenya, under the first medium Term Plan under the Vision 2030, covering the period 2008-2012,there is a target to raise gross savings as a percentage of GDP from 16.2 per cent to 27.2 per cent and gross investment as a percentage of GDP from 23.2 per cent to 32.6 per cent.

Achievement of such targets is predicated on robust and vibrant securities markets.

In Kenya, the Bond market is relatively well developed compared to the other countries in the region.

However, this is true for the government bonds. The corporate bond segment has grown but it is still far behind what was envisaged in policy documents setting out the country’s development agenda.

This is an area that needs concerted efforts from all the relevant stakeholders to remove any impediments that may be constraining its growth.

It is expected that if corporate bonds become a significant source of financing, the high interest rate margin in excess of 10 per cent in the banking system in Kenya and indeed the other countries, could reduce.

The capital markets are a potential source of long term funding for infrastructure and some of the countries represented here may have issued infrastructure bonds. Special Purpose Vehicles (SPV) could be established to issue bonds to fund projects with income streams that would be utilized to service bond repayments.

In Kenya, issuance of infrastructure bonds has been quite successful since 2009 when program started and a total of Sh82 billion (US$82million) has been raised for projects in Energy, Roads and Water sectors.

However, since the repayments of these bonds are still from the Government Budget, they are strictly not true infrastructure bonds.

We urge various public enterprises with strong balance sheets and healthy cash flows to venture into capital markets to raise funds.

Kengen, one of the companies in the energy sector, successfully issued an infrastructure bond and raised Sh25 billion (US$250million) and we urge others to follow the example.

For development of the bond market to be achieved, a stable macroeconomic environment is a prerequisite. As you are aware, most of our countries are facing serious imbalance due to high inflation and volatility in exchange and interest rates.

In Kenya, the 12 month overall inflation has reached 18.9 per cent per annum; exchange rate has reached over Sh100 to 1US$ on some days and interbank rates have fluctuated reaching 24 per cent per annum.

This instability has impacted adversely on the government ability to raise the budgeted domestic resources since there are few takers for Government securities.

The volatility has also affected the performance of both equities and bonds in the Nairobi Securities.

The Government, together with other stakeholders, is taking measures to stabilise the market but the lesson learnt from this is that there is need for a very close coordination in execution of monetary, fiscal and debt policies and a framework to ensure that the coordination happens should be put in place.

Mr Joseph Kinyua is the Permanent Secretary, Treasury. This is an edited version of a speech he delivered during regional conference on bonds market in Nairobi.