Kenya’s creditworthiness drops due to financial risks

In the new financial year that starts in on July 1, Kenya will need to pay a total of Sh630.1 billion. ILLUSTRATION | NATION MEDIA GROUP

What you need to know:

  • Kenya has been on a borrowing spree over the last eight years to plug its budget shortfall as well as finance infrastructure projects.
  • The severe tightening of financial conditions will challenge the government’s ability to meet larger gross financing needs.

Kenya’s appetite for debt has come to haunt it at its time of need after global rating agency Moody’s gave it a negative credit rating.

The downgrade has handed the East African country a severe blow coming at a time when the National Treasury is going to rely heavily on external borrowing to finance its ballooning budget.

In a briefing to investors on Friday, Moody’s Investor Service revealed that it had changed Kenya’s ratings to negative from stable due to the rising financing risks posed by the country’s large gross borrowing requirements.

This is the worst rating Kenya has had in the last five years. It means that Kenya will now get loans more expensively than before and there will be fewer lenders, who will be fighting to give Kenya money due to the risk of default.

NEGATIVE OUTLOOK

Until the Covid-19 pandemic struck Kenya, the main reason for continued lower rating was the ballooning public debt driven by a high fiscal deficit as well as weak financial institutions.

Kenya has been on a borrowing spree over the last eight years to plug its budget shortfall, as well as finance the Jubilee government’s ambitious infrastructure projects.

This has seen the country borrow at least Sh550 billion every year from both international and local markets. This translates to about Sh45 billion a month or Sh1.5 billion every day.

“The negative outlook reflects the rising financing risks posed by Kenya’s large gross borrowing requirements, which include armotisation of bilateral debt and the need to refinance a large stock of short term domestic deb,” Moody’s said in its briefing dated May 7.

FISCAL POLICY

The downgrade comes at a time when the fiscal outlook for Kenya is worsening due to erosion of its revenue base and a debt structure that exposes its fiscal metrics to exchange rate and interest rate shocks.

The agency says that while Kenya does not face acute financing pressures, the severe tightening of financial conditions will challenge the government’s ability to meet larger gross financing needs, without an increase in borrowing costs that would threaten medium-term fiscal consolidation efforts.

Mr Tony Watima, an economist, said this latest downgrade will hurt the country more given that even before Covid-19, Kenya’s fiscal policy was ‘already leaking’.

“Our fiscal space had been consumed and Covid-19 has just exposed it further. What this means is that cost of foreign borrowing will be expensive for Kenya because our credit worthiness is not good,” Mr Watima told the Nation in a telephone interview.

“This also raises the cost of refinancing the large stock of short-term debt that are set to mature,” he said, adding that the credit rating drop has raised Kenya’s financing and refinancing risk in the international credit market and the government will have it rough when it starts restructuring debt.

Data from the Central Bank of Kenya (CBK) shows that as at March 20, Kenya’s domestic debt stood at Sh3.04 trillion.

A bulk of this — about Sh2 trillion — was made of Treasury bonds. Treasury bills excluding repos stood at Sh925 billion.

DEBT SUSPENSION

The rest of the debt was in the form of overdrafts at the CBK and other domestic debt, which include clearing items in transit, advances from commercial banks, Pre-1997 Government Overdraft and Tax Reserve Certificates.

On its part, the external debt stands at $30.66 billion, or Sh3.27 trillion, with the local unit at 106.7 to the dollar. This brings the total debt portfolio for Kenya at Sh6.3 trillion.

President Uhuru Kenyatta revealed recently that Kenya had opened talks with external lenders to suspend debt during the Covid-19 crisis.

“We are in discussion with the largest economies in the world on the issue of suspension of debt for a period in order to allow countries to spend more on combating this pandemic,” President Kenyatta said.

The Head of State said that other regional and global institutions, such as the African Development Bank and the Africa Import Export Bank, have created emergency credit facilities that Kenya plans to tap into.

“We will utilise these facilities to support producers and exporters so that they can return to full production and protect jobs and livelihoods,” the President said.

A third of all the debt billions that fall due this year belong to China, through the Exim Bank of China and China Development Bank, making the Asian nation one of the most important countries that Kenya must engage in dealing with the debt headache.

CREDIT SHOCK

In the new financial year that starts in on July 1, Kenya will need to pay a total of Sh630.1 billion.

Moody’s said that the rapid and widening spread of the coronavirus is creating a severe and extensive credit shock across many regions and markets.

The combined impact of border closures and measures to contain the spread of the coronavirus, as well as supply chain disruptions, will weigh in on almost all sectors of Kenya’s economy.

It says that weaker growth and larger fiscal deficits will further aggravate Kenya’s already high debt and interest burdens.

Moody’s expects that Kenya will not participate in any debt relief initiative that requires the participation of private sector creditors, which could carry further negative implications for the country's rating, and more generally that Kenya will meet all its debt service commitments to private sector creditors.

“Contrary to previous expectations of declining borrowing requirements underpinning the rating, Moody’s expects gross-borrowing requirement will remain around 22 per cent of the Gross Domestic Product in fiscal year 2020/21 (ending June 30, 2020), a relatively high level compared with other sovereigns,” the brief notes.

Although Kenya does not have any large principal payments due in the near term (the next Eurobond principal payment is in 2024), the country is at the start of a more difficult external amortisation schedule.

“The challenges posed by the external amortisation schedule are compounded by a large stock of domestic debt that needs to be rolled over on annual basis,” it said.

MULTILATERAL FINANCING

Treasury bills account for 31 per cent of domestic debt as of December 2019, up from 25 per cent at the end of 2014.

Moody’s expects that the government will rely on concessional multilateral financing for much of its additional borrowing requirements in fiscal year 2019/20 and fiscal year 2020/21, with the remainder covered through increased domestic borrowing.

“It is possible that the government may also seek other forms of relief, possibly including on loans from Chinese state-owned banks,” it said.

More generally, delays or changes in debt service payments, owed to private sector creditors compared to the original terms of the contract could be negative for the sovereign’s rating.

“Financing risks are rising at a point when Kenya’s fiscal strength is eroding. The shock to growth and larger fiscal deficit as a result of the coronavirus outbreak will worsen Kenya’s already high and increasing debt and interest burdens,” the agency noted.