Kenya risks severe exposure to liquidity risk in case of significant shock in domestic banking sector, global rating agency Moody’s has said.
‘’Significant constraints on banks’ capacity and willingness to absorb potential increases in government financing needs in the event of a shock are intensifying government liquidity risks in Kenya (B2 stable),’’ Moody’s said in a report released on Tuesday.
Dubbed “Sovereigns - Africa and Middle East, Domestic banking constraints intensify liquidity risks as global markets tighten - the rating firm cautioned against the country’s over reliance on domestic loans to fill revenue and tax gaps.
“When governments’ access to external markets is constrained and more costly, their capacity to finance borrowing needs from domestic banks is a key driver of their liquidity risk,” said Moody’s Vice President and lead author Lucie Villa .
The credit rating firm said that government’s debt appetite in Kenya and other four countries in Africa and Middle East are too high to be sustained by local lenders occasioned by limited deposit flows.
“In Angola, Bahrain, Ghana, Kenya and Lebanon, governments combine at least two of the following constraints: government borrowing needs are large relative to the size of their banking systems, banks’ exposures to government debt are already high, and deposit inflows are low relative to fiscal deficits.”
The report assesses Middle East and African governments’ capacity to fund their borrowing needs from domestic banks looking at banks’ capacity and willingness to meet government borrowing needs.
Moody’s report is coming at the time Kenya’s national treasury is toying with the idea of borrowing in the local currency at the international market.
Speaking during the Africa Economic research conference held in Nairobi in December last year, Treasury CS Henry Rotich said his ministry is working on a framework that will allow the country issue bonds using the shilling at the international markets.
“Raising funds using local currency would reduce Kenya’s dependency on foreign currency and the resultant impacts of external shocks and volatilities that often lead to higher debt servicing costs,’’ Rotich said.
While presenting budget statement for 2018/19, Rotich promised to go slow on external loans.
He also promised to strike a balance between external and domestic borrowing, targeting 50:50 ration between domestic and external loans.
This year, Kenya plans to borrow Sh282.5 billion and Sh276.1 billion in external and domestic loans respectively.
“This implies an increasing focus on manageable domestic borrowing,’’ Rotich said.
Increased domestic borrowing by government will negatively affect private sector lending.