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T-Bills: Investor’s golden opportunity or the country’s future disaster?

Over the last few weeks, the Kenya T-Bills have been both in several headlines and in the center of most economic talks. Everybody started to talk about them. So I believe it is important to understand what T-Bills are and what is happening with the T-Bill high yield increase.

Treasury Bills (T-bills) are the most marketable money market security. Their popularity is mainly due to their simplicity. Essentially, T-bills are a way for the governments to raise money from the public.

T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturities. With exception of the 364-days paper which is on offer once every month, 91- and 182 -days Treasury bills are sold weekly.

Each new offer is advertised in the newspapers (Daily Nation Newspaper on Fridays). T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity.

For example, if you bought a 100,000 KES – 91-day T-bill at KES 96,000 and held it until maturity, you would earn 4,000KES on your investment, (depending on the % offered). This differs from coupon bonds, which pay interest semi-annually. Investors who do not wish to hold their investments until maturity are allowed to sell back (rediscount) their Treasury Bills to Central Bank as a last resort. This is however punitive to the investor as a way of discouraging the practice.

Treasury bills (as well as notes and bonds) are issued through a competitive bidding process at auctions. If you want to buy a T-bill, you submit a bid that is prepared either non-competitively or competitively. In non-competitive bidding, you’ll receive the full amount of the security you want at the return determined at the auction. With competitive bidding, you have to specify the return that you would like to receive. If the return you specify is too high, you might not receive any securities, or just a portion of what you bid for. In Kenya, as of this year (2015), a retail investor can electronically invest in government securities with as little as Sh3000 in a move that was bound to improve market liquidity.

The biggest reasons that T-Bills are so popular is that they are one of the few money market instruments that are affordable to the individual investors. Other advantages are that T-bills (and all Treasuries) are considered to be safe investments because the government backs them.

The question is though what determines the % that the government is willing to pay in order to borrow money?

Just over a year ago (July 2014) the yield on the 91-day Treasury bills was at 9.27 per cent. Today, October 2015 interest rates have gone haywire, with the weighted average interest rate on the benchmark 91-day Treasury Bill surging to 20.6 per cent. This is a 12%+respectively real increase of the interest that the Kenya government is willing to offer in order to achieve cash liquidity and pay its bills. The actual increase is over 120% in a year!!! Considering the fact that the government had planned the Budget in June, expecting that would go to the market and borrow money at 8 per cent the situation becomes more complicated. The increase of the T-Bill interest rates has also a direct effect on the inter-bank rate which is over 27% already.

A large government expenditure growing day after day requires more and more income and when the income is not enough the need to find alternative solutions to finance the country’s expenses is obligatory. The country already has borrowed large amounts of money directly from the IMF (International Monetary Fund), Europe via Eurobonds and indirectly from several other sources outside the country for it to support the expenses and the infrastructure projects that are under construction around the country.

Another way to get cash is to look for money inside the country by targeting retail and institutional investors via T-Bills, bonds etc. When I see a government who is ready to accept as little as KES 3000 while offering over 20% interest rates … I start to worry.

How bad is the situation?

Over the last 12 months, we have seen the currency losing over 15% of its value against most of the foreign currencies, we saw the expected growth rather going down. We faced a two times increase of the CBR in just 30 days by almost 30%, (CBR was 8.5% and now 11.5%). We have seen the account balance deficit growing, the external debt becoming bigger and with the currency losing its value, it is becoming harder to be repaid, unemployment remaining extremely – scary high, the real estate sector stagnating and already starting to go down, tourism sector not been able to recover, the stock market facing huge challenges, two banks have gone down, and the list goes on.

All the above bad economic data force the government to offer more in order to find money to pay the country’s liabilities and bills. Part of what is happening is because the government is trying to defend the shilling by all means. And that is what is pushing the interest rates high, the emerging need for money by the government.

Sounds like this is a good opportunity for investors to make some good and easy returns?

In the short term maybe. The reality is that what matters is not the % we get for our money but the actual value of our money. For example in UK, you will get maybe 1% return on T-Bills but the British Pound remains strong, with high value growing against almost all foreign currencies. So actually even if you get 30% on your money but the country’s economy is not strong enough in order to support its currency and create sufficient income to be able to pay its bills then eventually the local currency will devaluate, and the whole economy will go into a new phase with big challenges.

So before we start celebrating I suggest we start to read behind the letters. Understand where we are standing; is it solid earth or moving sand?

The problem of the Kenyan economy is quite complicated although it is easy to explain. Like every business, a country needs to produce more income than its expenses. A healthy business also requires to make the right moves and expand in a sustainable way that will create the right environment for a profitable future.

If we start to grow a business and while we are doing well we start to spend money without control, this results to lack of healthy business expansion. When our managers and stake holders spend most of their money without reinvesting in the future of the company or decide to proceed very fast with mega plans that will expose the company’s liquidity, then the chances to see our business going down are very high.

If we start borrowing money not in order to produce more and create profits but just to pay bills, then the problem becomes bigger. If most of our staff ,our stakeholders and people involved decide to work less and would rather prefer to invest in something else and not in our business opportunities then the future is not bright. And this is what is happening with Kenya.

The business called Kenya has lost its orientation. Everybody from the last citizen to the heads of the country is living in a dream world. We lost the reality between the big announcements, the big words and the mega projects. Everybody is spending more than what they are making, the private sector as well as the government. Everybody is looking for easy ways to make money in the short term closing the eyes to the future. The country’s private (and not only) wealth has been spent in Real estate, creating big cities without any planning or real value. All other sectors of the economy are secondary. The sectors that made Kenya to be a leading country in East Africa and created a positive expectation for its future, like agriculture and tourism get less and less investments every year.

The only sectors that keep growing is the public sector and the expenses. Should we blame the governments? I always prefer to stand in front of a mirror and first blame myself. It is everybody’s mistake and contribution to what is happening to Kenya today. A country with more people involved in the real estate business than actual house owners. A country that is trying to run before it can walk. People who prefer to drive an expensive car instead of sending their kids to a good school. A society that prefers the easy way of reading the headlines but not the actual articles. A community where there is always someone else to blame for everything.

Obviously, the governments make decisions but the governments play the game according to what the public is ready and/or wants to accept. The result is that today Kenya is facing huge challenges and the coming years are critical for the country’s future.

The huge need for cash flow, the account balance deficit, unemployment, huge consumption, high dependence to global markets, the challenged Kenyan shilling and so many other factors are ringing the bell.

It is time for Kenya to start changing, time to produce more and consume less. The global economic environment is extremely volatile, things change day after day. In the coming months, important changes are expected to happen that could affect Kenya (i.e The US hike of interest rates expected on December). Kenya cannot afford to lose any more time. The economy numbers are showing that things need to change ASAP. The need to start boosting the Kenyan promising and positive sectors of the economy like tourism, agriculture, transportation and manufacturing is a must.



Kosta Kioleoglou

REValuer by Tegova
Civil Engineer Msc-DBM
Africa Plantation Capital ( http://www.africaplantationcapital.com/)