Government spending across east Africa is set to rise as Kenya and Uganda pursue pro-growth budgets, although Kenya said more foreign financing should take the heat out of an over-stretched local bond market.
Finance minister Uhuru Kenyatta outlined 2011/12 spending on Wednesday of 1.155 Kenyan shillings (US$13.3 billion), a 15 percent increase on last year that is likely to push the deficit to 7.4 percent of GDP, higher than a 6.8 percent projection a year ago.
However, mindful of soaring bond yields in the last 12 months — a product of both sharply accelerating inflation and hefty domestic debt issuance — Kenyatta kept local borrowing broadly flat at 119 billion shillings, reuters reports.
“Domestic borrowing was already really high in Kenya, so if they had come and said that on top of that they were going to increase issuance, that would have been a big blow,” said Coura Fall, an analyst at Citi in Johannesburg.
Inflation in east Africa’s biggest economy jumped to 13 percent in May, dragging domestic bond yields higher. The country’s 3-year bond KE3YT=RR was yielding nearly 11.5 percent in the run-up to the budget.
Underlining the heavy cost to the government of paying for day-to-day operations and financing massive infrastructure investment, yields at a 364-day Treasury bill auction on Wednesday jumped to 10.25 percent from 6.77 percent in May.
“It is instructive to note that major investors in this market have pushed the rates to levels that make domestic debt expensive. The government therefore cannot contract debt at such levels,” the central bank said in a statement.
Reflecting such concerns, Kenyatta, whose administration faces an election next year, said external financing — basically multilateral lenders such as the International Monetary Fund and World Bank, as well as bilateral donors — would contribute 117 billion shillings to the budget, roughly half its planned receipts.
“We do not expect short term interest rates to rise drastically, but care will be taken to ensure credit to support economic productivity,” he said.
The recourse to external, non-market funding — Kenyatta made no mention of a possible Eurobond issue — is a change of tack for Kenya, which has historically absorbed far less foreign aid than its regional peers.
In Uganda, where domestic bond yields have also leapt in conjunction with inflation now at 16 percent, its highest since 1994, the government said foreign aid would account for 29 percent of official receipts.
Newly appointed finance minister Maria Kiwanuka Uganda said the economy would grow 7 percent in the 2011/12 year, while inflation would drop back to just 5 percent.
Rwanda also released its budget on Wednesday, but in contrast to its larger neighbours, projected a deficit of just 2.3 percent of output.
Tanzania, the region’s most populous nation, finance minister Mustafa Mkulo said spending would rise 16 percent to $8.6 billion due to major investment in infrastructure, although the government would not run a deficit.