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February 22, 2018

Blow to Eurobond bid after Moody’s lowers Kenya’s rating

Treasury CS Henry Rotich at Parliament Buildings on March 30 last year /JACK OWUOR
Treasury CS Henry Rotich at Parliament Buildings on March 30 last year /JACK OWUOR

Global rating agency Moody’s has downgraded Kenya’s credit scores, citing pressure from the country’s rising debt levels and its weak financial muscle to service existing ones.

The agency downgraded Kenya’s issuer rating to B2 from B1. 

what does the downgrade mean?

It means the country is more vulnerable to defaults, a move that is likely to send investors in both local and international bonds into a panic.

Those ready to take up risk are likely to demand higher interests, forcing Kenyans to dig dipper in their pockets to repay. According to Moody’s, Kenya will spend Sh2 in every Sh10 to service interest on its debt, up from Sh1.30 for every Sh10 collected by the Kenya Revenue Authority in 2012 before President Uhuru Kenyatta ascended to power.

Less credit for SMEs, low job creation

Due to a lower creditworthiness, conventional international development creditors such as the IMF are likely to shy away from loaning Kenya, stalling infrastructure, education and health projects which directly benefit Kenyans at the bottom of economic pyramid.

The government is also likely to turn to local commercial banks for funding, taking away the little meant to finance the private sector and especially small-scale business operators perceived to be riskier by banks, killing businesses and job creation.

Small and Medium Enterprises currently account for 70 per cent of jobs created per year.

foreign currency

Moody’s also lowered the country’s long-term foreign currency bond ceiling to Ba3 from Ba2 and the long-term foreign currency deposit ceiling to B3 from B2. Moody’s has also lowered the long-term local currency bond and deposit ceilings to Ba2 from Ba1

Rising debt levels

The rating firm cited Kenya’s weakening fiscal outlook with a rise in debt levels and deterioration in debt payment as the basis of the downgrade which has been on a review since October last year

Moody’s forecasts government’s debt to GDP to increase to 61 per cent in the next financial year, up from the current 58 per cent.It also cited an increase in government’s interest payments as a share of revenue as an indicator to dwindling debt repayment muscle. 

Kenya is now offering 19 per cent as interest payments as a share of revenue up from 13.7 per cent five years ago

“We expect a further rise to 20 per cent in 2018. Kenya’s government external debt, which stood at 31.6 per cent of GDP as of June 2017, continues to shift away from concessional debt toward commercial and semi-concessional debt, leading to higher financing costs,” Moody’s said in a statement. Kenya’s short-term domestic debt grew almost three-fold to 9.4 per cent of the GDP at the end of the last financial year from 3.3 per cent of the GDP five years earlier.

 all not lost

While the B2 rating is termed ‘speculative’ and is still in the same category with BI, lowering of Kenya’s long-term foreign currency bond ceiling to Ba3 is likely to hinder investor confidence in the country’s $3 billion (Sh300 billion) Eurobond currently on a roadshow in the US

All is not lost though. Moody’s said Kenya’s economic strength is supported by a relatively diversified economy, with high growth potential at around 6 to 6.5 per cent, which provides some capacity to absorb economic shocks.

Last week, Fitch ratings while affirming Kenya’s credit score at B+ praised the country for overcoming political and fiscal shocks to achieve a stable outlook.

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