Capital market players are worried 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 (APTAK) said this at a consultative meeting seeking to stabilise the country's capital market currently experiencing a bear run and foreign investor flight due to weak shilling.
In an interview with the Star, the lobby's chairperson Hosea Kili said APTAK members are working on a module that will see domestic capital fuel the growth of public equities in Kenya and shaping a prosperous financial landscape.
''We are advocating for 'patriotic investment'. The current yields on domestic bonds and T-Bills are not sustainable. We want to create a sound environment where our investments will add value to our economy,'' Kili said.
The government has in the past year been dangling a high-yield carrot to local debt investors as it sources funds to fund the budget deficit.
When he took over power late last year, President William Ruto vowed to borrow locally to ease foreign currency pressure on the public debt currently standing at Sh10.6 trillion.
The high demand for local debt by the government saw yields on bonds and Treasury Bills rise to an average of 18 per cent and 15 per cent respectively.
"When interest rates go up, the value of bonds goes down, and bondholders’ wealth goes down,'' Kili said.
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 duration.
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 Sh374.5 billion in internal domestic debt redemptions- summation of Treasury bonds and bills maturities, in the fiscal year to June.
The redemptions are expected to trend upwards, reaching Sh564.4 billion in the 2026/27 Financial Year.
Currently, domestic capital allocation from pension schemes to quoted equities stands at 10.22 per cent of Assets Under Management (AUM); despite the favorable valuations of listed companies.
Notably, investment in the Equity market is disproportionately concentrated on large companies, accounting for over 80 per cent of the market capitalization.
''This situation is unsustainable and demands strategic interventions to safeguard our investment value. I urge us all to collaborate, innovate, and chart a course that not only navigates challenges but unlocks the vast opportunities awaiting our collective vision,'' Kili said.
According to him, the consultative forum serves as the crucible where innovative strategies will be unveiled, illuminating the transformative power of local institutional capital.
The Equity market has been experiencing declining performance in the past years, a matter of concern to all stakeholders.
The shilling tumbled against major international currencies including the US dollar where it has slumped 20 per cent year-on-year. Yesterday, it closed the day at 152.40 units against the greenback.
East African securities markets have fallen by an average of 17 percent in a year, as foreign investors continue dumping shares of blue-chip companies in favour of high-yielding investments in the US and Europe, buoyed by soaring interest rates in the developed markets.
The Kenyan market is the hardest hit by the foreign investor exits, with the Nairobi Securities Exchange (NSE) All Share Index (NASI) plunging by 30.74 per cent to 89.35 as of November 13, from 129.02 on November 14, 2022.
During the week ending November 10, foreign investors remained net sellers on the NSE for the fifth consecutive week with a net selling position of $2.1 million, from a net selling position of Sh45.6 million recorded the previous week, taking the year-to-date foreign net selling position to Sh43.7 million.
Kenyan pension schemes registered negative returns in the quarter ended September on wider losses from equities.
According to the Performance Investment Management Survey by South Africa-based investment firm RisCura, the weighted average return of surveyed schemes was posted at negative 3.06 per cent in the quarter from a return of 0.18 percent in the previous quarter.
The weighted average return from equities deteriorated to a loss of 10.95 per cent from losses of 4.27 per cent in the quarter ended June, driving the drag on the scheme’s total performance.
Banks, which are holding up to Sh1.59 trillion worth of Treasury bonds are at risk of losing significant value as a result of the high interest rate regime sustained by the government’s increased borrowing from the domestic market.
This could impact liquidity and the ability of the lenders to meet maturing debt obligations.
The CBK estimates that if the average bond yields increase to 18.85 percent and 19.9 per cent, under moderate and severe scenarios, banks will record unrealised bond valuation losses of Sh154.8 billion under the moderate scenario and Sh208.7 billion under the severe scenario, against the baseline estimates of Sh96 billion.