@ wa ithaka...u have a point..cbk however argue that many tbill issues are to basically absorb maturing obligations...but yeah GOK has tonnes of money yet they do zero with it..

When debt becomes an issue you have to get creative and find every way to pay it down or simply pay it latter. The CBK decided to simply revise the figures for domestic interest payments in their recent weekly bulletin from Ksh49.0 billion to Ksh46.8 billion (the difference representing 27% y-o-y growth vs 21% now). The revision is on interest paid on Treasury Bills, so now we can see that the benefits of the lower T-bill.

Read more in the documents (pages 5 & 6) below:

http://www.centralbank.g...tin/2010/May/140510.pdf
http://www.centralbank.g...tin/2010/May/210510.pdf

How far down will T-bill go? Excerpts from BD article.

The falling return on government paper not only makes it easier for the government to borrow cheaply from the private sector, but it’s set to influence the direction of commercial bank lending and trading at the Nairobi Stock Exchange (NSE).

Financial analysts forecast that the rates could fall further as high liquidity, fewer investment options and risk aversion by high net worth investors push investors to place lower bids to allow them get larger allocations on the government paper.

“Chances are that the banks will continue to put money into government paper even if it sinks below the rate of inflation,” said a research analyst at an investment bank who spoke on condition of anonymity.

“In any case, they have too much cash lying idle and they can as well make something, however small it is.”

Read more:

http://www.businessdaily...76/-/9id2le/-/index.html

@Scubidu, we will have a Sh1 trillion budget this year. Recurrent expenditure is going to be Sh321 billion, how do you see the GoK getting this money.

@All did not mean recurrent but development.

In previous posts we’ve looked at the productivity of debt (debt vs GDP). But now more important are domestic interest payments given the budget deficit and reduction in short term rates. The correlation between debt and interest is quite good and it was in 2006 that the CBK debt management division began to address Kenya's domestic debt stock more vigoriously. The 5 year correlation between domestic interest payments and gross domestic debt are below:

2006 – 55%
2007 – 86%
2008 – 99%
2009 – 95%
2010 – 98%

So the growth in interest and debt has been climbing at the same rate. But is this deliberate? We need to investigate what criteria or formula (if any) is being applied to debt repayment. The interest paid on the annual average gross domestic debt is as follows:

2006 – 9%
2007 – 10%
2008 – 10%
2009 – 10%
2010 – 10%

Isn't it interesting that since 2006 interest payments have roughly been around 10% of average annual gross domestic debt. Just a coincidence? We have to remember that KRA revenue collection has grown at ~15% pa, so that has enabled the debt service ratio to remain below 30% (we covered this in an earlier post). But what is the trend in interest payments vs growth in new debt stock especially given the huge budget funding gap? The interest paid per shilling of new debt

2006 – 0.7
2007 – 0.8
2008 – 1.6
2009 – 0.5
2010 – 0.4

For every Ksh 1 in new debt we only paid Ksh 40 cents in interest payments in 2010. This is the lowest ratio since 1997 (my stats only go that far back). So are we paying debt down faster? No many bills/bonds have matured but as a matter of policy government doesn't make principal interest payments on domestic debt before maturity. So what is enabling the interest payments to drop?

The ratio of new debt stock issued (T-bills vs T-bonds)

2006 – 42/58
2007 – 0/100
2008 – 0/100
2009 – 48/52
2010 – 38/62

The ratio reveals that in 2006, 2009 and 2010 T-bills contributed big to new debt stock. The highest increase in interest payments was in 2006 when they rose 41% at a time when average short term rates were 5.83%. A combination of high debt stock and high rates. The average short term rates were 8.59% in 2008 hence the ratio of 1.6 interest/new debt (see above). A combination of high rates during high redemptions.

So have T-bills reached a floor?, I have no idea, but the rates are probably being matched against expected domestic borrowing. Given the lack of excess reserves currently would you borrow on intbank, rev repo or horz repo at 1.6%, 1.7% and 2.5% respectively to get a hold of 91D paper giving you a 1.7% return?. As an act of monetary policy the current drive to implement a low interest rate regime may not be targeting private sector credit growth alone but a key tool in containing the interest payments on our ever growing debt.

And a final quick word on Kenya's debt productivity. The real economy as measured by GDP 2001 constant (in % terms) must grow by 6.45% this year to justify productivity on a 1:1 ratio to the 90B of issued gross debt stock since the beginning of 2010. And imagine we've still got five more months of borrowing left.

The official statistics are out in the latest monthly economic review indicate that debt productivity was 0.2. The published results show that GDP rose from 1.35 trillion to 1.39 trillion meaning that for every shilling of debt created by our banking system only 20 cents was generated as revenue. This is indeed a sad state of affair but this year, there are signs that the trend will continue unless GDP grows fast.

But interesting thing in the monthly review was the CBK balance sheet which indicated increased investment in US bonds by the CBK (almost 8 billion worth). However it is difficult to know whether these figures are reliable because the figure on the liability side of the balance sheet is negative and the CBK balance sheet isn't even balanced (tsk tsk).

Check out the monthly review below.

http://www.centralbank.g...tions/mer/2010/May10.pdf

Peter Schiff explains the problem with debt. Check out the video below after 6:00 minutes.

Read more:

http://www.youtube.com/user/SchiffReport

Peter Schiff explains the problem with low interest rates. Check out the video below after 2.15 minutes.

Read more:

http://www.youtube.com/user/PeterSchiffChannel

goldendelight wrote:


@goldendelight. There are a few alternatives to FRB (including miniature versions like community currencies) but they have they're own flaws. FRB is the best and most flexible system though but insanely unsustainable because of our finite world. Most people our age will be dead when the real damage is done, so most don't pay attention to FRB. So for now most can exploit the system, but the next 20 years will be interesting to watch (especially when the US goes down). Our monetary system is fairly conservative, but we haven't had it for long and our politics hasn't affected things too badly (except Goldenberg 93/94). Not sure how much flexibility they'll have in future.

Yes, watched money as debt and many other documentaries (have a whole library). There's a school of economics called Austrian Economies (www.mises.org) that I'm still reading about...they have some interesting ideas and working papers. How can you escape the trap as an individual? Don't get into debt. The movies highlighted the key problem...interest. You need to save more. Kenyans are normally averse to debt. Unfortunately our whole GDP is dependent on consumption (either private or public) and so the policy is geared to less saving (US model vs China). Why should Kenyan's save? Inflation is low, non? but I didn't know they're hawking loans again. I suppose you and you colleagues earn enuf in their eyes to justify the loans and risk. Kenyan's are borrowing to consume. Which are the largest sources of private credit right now, trade (finance) and private individuals and they're growing quickly.

But what is more important is domestic investment, which brings us to the subject of your second point. I briefly read the article you attached. The IFRB's are great as we can tangibly see an increase in tax revenues from projects (also potential increase in domestic exports). Government wants to drive investment, but who does it better, government or private sector?

my 2 cents.

I don't claim to be an expert; these are just my thoughts so don't think they are all right. I'd appreciate talking more about 'money as debt' in greater depth and try to see if we can relate it to Kenya. I'm done.

Why do we complicate GoK debt talk? If you look at your income. Lets say you were funding your monthly spend (including savings) with a mixture of salary and debt, would you justify only putting 3% in investments as Kenya currently does?

@Wa_ithaka. Mr US uses its big salary plus loads of debt to fund its consumption. Mr China uses its big salary and savings to lend to Mr US. What happens to the US when Mr China stops lending it its salary/savings? Mr China can use his salary of himself and still has capital from his savings, non?

A quick analogy from Peter Schiff. From a speech he gave to mortgage bankers in 2006.

The same Wall Street analysts that told us the internet era was a new era are now telling us that this current era of American consumption and global production is viable and it’s not. I’ll give you a quick little analogy and move on to another subject. I mentioned this on my website and used it in various speaking engagements, but to describe it as dynamic.

Assume that a group of castaways are stranded on an island; let’s say five of them are Asian and one of them is American. They are stranded on this island and they have to divide up the workload, so one of the Asians is given the job of hunting and looking for meat. Another one is going to be fishing and looking to catch fish. And another one is responsible for exploring the island for vegetation and still another one gets the job of looking for wood, to build the fire, to cook the meal.

And then it comes to the American and they asked themselves what job they would assign to the American. Well the American gets assigned the job of eating. And so at the end of the day, all these Asians gather around this big table after a hard day of foraging, hunting and fishing and they prepare to feed this American, who did nothing all day but sun himself on the beach (he had a service economy). In any event a modern economist who was looking at this islands economy would say the American is the key to the whole thing. Without the American and his ravenous appetite these poor Asians would have nothing to do all day, they’d be unemployed.

Well the reality is, the Asian are more than capable of consuming the food themselves. Now perhaps if they did have to work all day long feeding this fat American, they wouldn’t have to work as hard, maybe they could pursue other interests they had. The best thing they could do to improve their standards of living would be to kick that American of the island. Off course when that happens the American is in trouble because he doesn’t have five Asians doing all his work.