The GDP figure for the year used in the calculation is in KES & hence static.

I acknowledge the reduction in foreign debt. If the GDP figure is static, it should have been amended in July 2011 (comprising the start of a new financial year 2011/12), should it? At which point the GDP estimates is adjusted from 2.7tr to 3.2tr, thus debt to GDP drops from 55% in June 2011 to 46% in July 2011. Then the GDP figure would be static for the remainder of the 12 month period; however, this is not the case. One would question whether a smoothing of GDP is warranted? It doesn't look good to have debt to gdp rising 10% in a year then dropping 10% in a month. Even more curious is the timing of the change - it is effected in October 2011. And more importantly applied shortly before we borrow $600m.

Debt money systems have become wasteful and our is not the exception. Well our debt sustainability is back in shape... 46% of GDP to be exact. But what's the cost of debt waste?

Our domestic borrowing target for the last financial year was 125 bn (amended), but only realized 109 bn by the end of that financial year. Off that debt incurred about 24 bn was unspent and now has been added back to our revenue (in addition to taxes, loans and grants). But putting this into context reveals that 22% of what we borrowed was unspent or 0.8% of GDP (that looks small but it isn't [46-0.8]).

Furthermore what was unspent was equivalent to the entire budget for the ministry of medical services for the 12 month period. What can be done about this? There are reforms being made to improve government's spending mechanism, but they are too slow to implement. Perhaps it's time to hire more accounts than economists so that these leaks are plugged.

The Kenya PPP Bill will become law soon (in my est.b4 end of this year) and that will open off (GoK) balance sheet financing for national infrastructure projects. That'll help GoK manage and use the National Debt Stock effectively while fast-tracking its mandate to provide Infrastructure. Good stuff

Seems energy infrastructure is so highly regulated. Looking at all the PPAs. They've barely scratched the surface with BOOT for energy transmission/distribution (LTWF seems to be the guinea pig). How effective could PPPs be for energy projects, unless clean energy producers get some sort of incentive for higher capital cost?

Something interesting that only KenGen can do. Get a government guaranteed loan, leverage up with subsidized funding and pass on all exchange losses to consumers through their balance sheet. Not exactly a level playing field.

When Eddy Njoroge, MD KGN, says para: "We'll be looking at new ways of raising capital for our projects." PPP is exactly what's on his mind. Maybe the likes of Mitsubishi Co. or even General Electric are potential suitors for KGN IMO.

"KGN partners GE to construct 300MW plant" 51/49% stake splits respectively for example.

World Bank guarantees unlock energy funding.

Read more:

http://www.businessdaily.../-/ofcsqyz/-/index.html

An interesting statement "Kenya is hard-pressed to finance major infrastructure investments given competing needs to finance various needs as the War in Somalia, general elections, and transport projects." In terms of debt sustainability we're still expected to continue spending very high amounts this year (as implied by the statement), which means that ability to pay interest and rollover debt obligations is important. When you can no longer increase your leverage sustainably then you have to use artificial aids. The development agencies have come up with a novel initiative for financing Kenya's energy infrastructure. This is very important given that investments will largely start to become funded externally (also we had also previously looked at the moral hazard public guarantees had on energy financing in particular with KenGen).

We're now getting assistance from the Multilateral Investment Guarantee Agency (MIGA) for political risk guarantees and the World Bank Partial Risk Guarantees "...to reassure commercial financiers concerned about the state-owned electricity utility and its obligations toward them". We'd looked at the impact guarantees had had on the competitive environment (post 129). But with the assistance of the above agencies is the playing field now leveling out? But now we have the aspect of political risk guarantees in addition to those 'debt related ones' which IMHO opens up the arena for PPP. Foreigners should be allowed to enter all aspects of building energy infrastructure if these guarantees exist.

The playbook in 2003 for energy sectors was to revamp KPLC, build capacity and allow direct access (for purposes of attracting FDI) to customers while also ensuring protection from political risk. Could this be the best way to build infrastructure and grow our debt sustainably?

Very interesting watch. Cutting of the domestic borrowing target was prompted by the syndicated borrowing and obviously used to justifying lowering of bond yields. Inflationary pressures also appear to be easing due to base effects on food inflation (mostly), which begs the question of low the policy rate can go. I have recently learned that the food and restaurant indices have been grouped together by the Central Bank to enable core inflation to decline, which incidentally is a major component in any decision to lower the CBR. Slowing down domestic borrowing is good cos you can lower interest rates and still maintain relatively tight monetary policy. This seems to be the strategy given that we still have a structural current account deficit (i.e., exports are no more covering imports than they were last year) which may threaten the exchange rate.

The budgetary policy statements' revised recurrent expenditures are 698b (up 4%), of which defense spending is 79b (up 35%), and development expenditures are 385b (down 3%). The defense spending is worrying despite our collabo with UN forces, et al cos there's no clear timetable of when it'll end (until we're safe???). As such you have to have a compromise where development expenditure gets the smaller share of domestic resources in order to finance potential increases in national security budgets. But the problem is not funding development expenditures becoz we have $600m coming, but actually spending the funds on time and the legality of the source of funding.

So the external loans and credits act places Kenya's external debt ceiling at 800b ($9.6b at 83), which means based on our current external debt we have $1.5b to borrow before we hit the limit. Assuming you factor in $600m we're going to receive from private investors and $100 we've already received from IMF then we're left with around $800m. If the currency depreciates by 8% this year to say 90 we'll have hit the debt ceiling on revaluation alone. Our choice is therefore to get parliament to amend the ceiling upward, so that we can fund our BOP or for the government to retain high interest rates to maintain the integrity of KES. Lastly even with an amended ceiling we still have to recognise that our BOP position is supported by short term flows, which will be compromised if interest rates are lowered.

All in all if the government was confident in our ability to borrow then the real experiment is to see if they'll start paying off their overdraft at Central Bank with any surplus they've gained from domestic borrowing. This is currently not the case. Reading the recent weekly bulletin on the CBK website they indicate that about 2.5b has been paid to CBK to date on interest on the overdraft. I'd wager that this is the single biggest source of income for the CBK now despite having over +350b in foreign exchange at the Fed and in eurodollar bonds (earning close to zero).

[quote=Scubidu]Today we're revisiting intervention. Kenya has been using an inflation targeting policy as the central bank told us the previous monetary policy technique (reserve targeting) was not working effectively. So inflation is coming down but you can't lower bond yields lest the currency takes a hit. Going back to two months we had CBK employ repos and TAD more aggressively to enhance currency stability.

This week we saw an interesting development. The 7-day repo rate tanked from 14% to 11.75%. The consequence was a resurgence of interest in the 91/182 Tbill and long end bonds - simply an outright mop-up. While CBK tells us they'll not suspend repo mop-ups, the interest in govt debt returns allows them to both raise money for Treasury (fiscal policy) and effect non-sterilized interventions on currency (monetary policy).

A interesting currency intervention technique used by the world bank (although not too publicized). The World Bank RAMP programme used UGX denominated bonds and didn't indicate the reason why. Usually they target a specific project or for general social use (usually having an impact environmentally). But simply put it created demand for UGX internationally (indirect intervention).

Read more below:

http://treasury.worldban...tm/UGX36_75Billion.html

http://en.wikipedia.org/...i/Currency_intervention[/quote]
Interesting this gimmick. This is why both equities & money markets are rallying together!? But how long can this be sustained without creating imbalanced liquidity feed? Sticking with tbils & tbonds is a better bet in the short term.