To succeed, listen to market players

President William Ruto’s nominee for the position of Governor of the Central Bank of Kenya (CBK) Mr Kamau Thugge

President William Ruto’s nominee for the position of Governor of the Central Bank of Kenya (CBK) Mr Kamau Thugge. CBK’s core mandate is price stability. And so, Dr Thugge has a big challenge of bringing inflation back to the target range.

Photo credit: Nation Media Group

It is going to be a baptism of fire for Kamau Thugge, President William Ruto’s nominee for the position of Governor of the Central Bank of Kenya (CBK).

He has the unenviable task of leading the search for a solution to the prevailing instability and unpredictability not only in the market for government securities but also in the broader financial marketplace.

Admittedly, CBK’s core mandate is price stability. And so, Dr Thugge has a big challenge of bringing inflation back to the target range. The country will be relying on him to tame the National Treasury’s big appetite for money which is beginning to lead the government to start treating the facility as a source of largesse.

His biggest headache in the short term, however, will be how to restore good relations with major players and participants in the financial markets.

In the search for a solution to an unpredictable marketplace characterised by a volatile exchange rate, high-interest rates on bonds, and frequent auction failures and cancellations, he will have to come up with an effective approach to engaging and consulting market participants more constructively.

Granted, the status of our economy is a result of deep structural problems, most of it on the supply side. We don’t expect the governor to wave a magic wand. Should he manage to bridge communications gaps with participants, he will have a better chance of eliminating uncertainty and restoring confidence in the players.

On Monday, I called up Thugge to assess whether he shares the view that cultivating and restoring good relations with players in the marketplace should be high on his agenda. He promised to grant me an interview after going through vetting and confirmation by the National Assembly.

On the subject of past CBK governors who placed communication and good relations with market players high on the agenda, I find myself reminiscing about the days when Nahashon Nyagah and Prof Njuguna Ndung’u, the current National Treasury cabinet secretary, were at the helm.

In those initial days of the government bond programme, constant interaction, engagement and communication with financial market players was a very big deal for the regulator.

We still remember that entity that used to be called the Market Leaders Forum, which used to meet every month at CBK to discuss the volume and maturities of upcoming bond auctions.

The Central Bank would also survey a wide range of other market participants by telephone prior to auctions. We in the financial media used to criticise the Market Leaders Forum because we felt that the participants had an advantage over other bidders as they had access to privileged information. 

Regular consultations

I don’t know who killed it but the opinion remains unanimous that it was a good example of how regular consultations with market participants are critical for a well-functioning and efficient market. 

In 2004, when the bond market was threatened with collapse, regular consultations and constant engagement with players is how CBK managed to quickly restore sanity in the marketplace. Just in case you don’t recall the events of that time, here is a bit of history and background about the turmoil that hit financial markets then.

During the first budget of President Mwai Kibaki, for the Financial Year 2003/2004, then-Finance minister, the late David Mwiraria, adjusted the cash ratio from 10 per cent to six per cent.

The objective was to free money to commercial banks and, therefore, stimulate lending to the private sector. Indeed, this experiment largely worked because interest rates on the 91-day Treasury bills declined substantially from eight per cent in December 2002 to below two per cent in late 2003 and the first half of 2004. Commercial banks started hawking loans to borrowers.

But turmoil hit markets when the tide started changing with interest rates rising sharply in September and October 2004. We all panicked because everybody feared that the sharp rise in interest rates would undermine the stability and solvency of financial institutions. Banks with large holdings of fixed-rate government bonds found themselves heavily exposed to losses in the new interest rate environment. 

There were also fears that the sharp rise in TB rates would cause the re-discounting of large amounts of government securities by CBK, leading to a large injection of liquidity in the system that the Central Bank would be forced to mop up. There were also concerns that high-interest rates would hike borrowing costs to the government.

Thugge will assume office in not-too-dissimilar circumstances. The rating agency Moody’s last week downgraded our three large commercial banks, basically on grounds of the likely impact of the current volatilities in the marketplace on the solvency of some of our banks.

My parting shot to Dr Thugge: Cultivate good relations and confidence of market participants. Don’t dismiss dealers and commercial banks’ treasury department employees as short-sellers and speculators bent on making money from market chaos. A little more listening will help you.


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