• Global credit rating firm Moody’s has attributed the high rate of non-performing loans in Kenya to slow payment by the government.
• Rating agency said the government’s arrears have started to weigh on business sentiment and has had an impact on domestic manufacturers.
Global credit rating firm Moody’s has attributed the high rate of non-performing loans in Kenya to slow payment by the government.
In its latest report on the country’s economy titled Kenya faces rising, but manageable, liquidity pressures, the rating agency said the government’s arrears have started to weigh on business sentiment and has had an impact on domestic manufacturers.
‘’Nonperforming loans (NPLs) at Kenyan banks have risen in recent years, a trend which can be indicative of accumulated arrears by the government to domestic suppliers,’’ Moody’s said.
The value of bad loans in the banking sector hit a new high of Sh345 billion at the end of March, raising questions on the health of the economy even as the lenders booked double-digit profit growth in the first three months of the year.
Banking sector data compiled from the lenders’ financial reports show that gross non-performing loans increased by Sh27.5 billion or 8.7 percent in the first quarter of 2019.
Speaking at a post-Monetary Policy Committee (MPC) press briefing in March, CBK governor Patrick Njoroge attributed the poor debt performance to delayed payments by both public and private entities and slow uptake of housing units.
President Uhuru Kenyatta issued a directive requiring State agencies to make quick settlement of pending bills in his June 1 Madaraka Day address to the public.
Last year, Moody's rated Kenya among economies in Africa with high non-performing loans.
Even so, the New York-based agency said although Kenya faces intensifying liquidity pressures, its fiscal consolidation efforts and Eurobond issuance should allow it to manage these challenges.
"Domestic liquidity pressures in Kenya are intensifying, but yields remain stable for now," said Lucie Villa, a Moody's Vice President - Senior Credit Officer and the report's co-author.
He added that Kenya's credit profile is increasingly vulnerable to any deterioration in the banking sector or adverse market sentiment.
‘’Reliance on commercial bank financing means the sovereign is highly vulnerable to adverse developments in the sector,’’ he said.
The credit rating firm said the issuance of a $2.1 billion (Sh210 billion) Eurobond in May 2019 allowed the government to refinance a maturing $750 million Eurobond and cover some of its deficit financing for the fiscal year.
Yesterday, the yield on Kenyan bonds due in 2024 was little changed at 5.144 per cent, while those maturing in 2032 and 2048 were down 0.4 per cent and 0.5 per cent respectively.
However, it also increased its reliance on external commercial debt at the expense of cheaper concessional funding and its exposure to shifts in global market sentiment.
Past performance suggests the government's efforts to increase revenue will be challenging to deliver, but Moody's expects that the primary deficit will continue to decline progressively to two per cent by 2021.
Kenya has set an ambitious target to lower its fiscal deficit to three per cent of the Gross Domestic Product (GDP) in the medium term (2022/23) in a bid to reduce public spending and limit borrowing.
It is targeting a fiscal deficit of 5.6 per cent this financial year down from 6.3 per cent financial year.
‘’Sustained deficit reduction is the government's main lever to reduce its funding requirements while lengthening the domestic debt profile remains a challenge,’’ the rating agency said.