Why the jury is still out on Kenya’s latest credit rating

The Standard and Poor's building in New York.

The Government is back to the global money market asking for loans between Sh150 billion and Sh300 billion to refinance existing loans.

Borrowing for worthwhile projects must be encouraged. However, certain quarters have cautioned Treasury’s rate of borrowing, pointing out it is damaging Kenya’s credit rating.

The Government could be more transparent about the use of the borrowed funds. The moment citizens question the use of loan proceeds, then there is doubt as to whether it is a worthwhile exercise.

It is almost certain that the Eurobond issue will be successful because investors always look for borrowers. In any case, financial institutions whether local or global are in the business of generating income by lending money to businesses, government and individuals. The advantage of lending to the State, unlike to individuals and business is that they are unlikely to default.

The principal economic function of banks in any economy is to finance consumption and investment. However, even at an individual level, if you keep on borrowing, then you risk losing your borrowing capacity.

You are also likely to be denied credit in future or made to pay higher interest on the same amount borrowed.

The analogy can be found in the credit arrangement between banks and Central Bank. A bank that keeps on borrowing at higher discount rates is likely to face investigations.

The assumption is that those who borrow to repay earlier loans are in financial difficulties and are likely to default.

Kenya is an emerging economy and unlike developed economies, the lending process is subject to careful monitoring.


It appears Kenya is entering a stage where its creditworthiness is being questioned. This is derived from the lack of agreement about her credit rating by three agencies - Fitch, Moody’s and SRP. Banks in developed economies do not lend to countries that have a history of defaulting.

Such banks are allowed by their governments to only invest in investment grade securities rated at least BAA or BBB to protect depositors from excessive risk.

Banks are particular about credit risk and rely on credit-rating agencies such as Moody’s. A credit-rating agency rates the borrower’s ability pay back debt, making timely interest payments while determining the likelihood of default.

In terms of market share, Moody’s Investors Service and Standard & Poor (S&P) together control 80 per cent of the global market while Fitch’s ratings control around 15 per cent.

Moody’s is the bond credit rating wing of Moody’s Corporation, a firm that tells investors their potential losses on lending to a particular institution, private or government.

Moody’s measures the expected losses in case there is a default, but S&P and Fitch advise the investors whether the borrower will default or not. Moody is the opinion that our credit rating has declined; they are questioning the impact of current borrowing on Kenya’s debt capacity.

Moody’s has downgraded Kenya’s credit rating from B1 grade to B2; and if that is the actual position, then Kenya will have to pay higher interest on future loans.

However, Treasury ignored Moody’s rating and turned to Standard & Poor (S&P) and Fitch that rated Kenya’s debt capacity favourably. The danger to Treasury is that they have solicited for the services of S&P and Fitch, paid them, setting the platform for conflict of interest because both must choose between rating securities accurately and serving their customer.

In this case, it is the Government that needs high ratings to be able to sell bonds to investors to raise the required funds.

Investors appear to be wary of solicited credit ratings as they might not be as objective as they ought to be.

The US leans more towards unsolicited credit rating. S&P issues credit rating of private institutions and governments and is a nationally recognised.

It is not unusual for S&P to downgrade government bonds. In 2011 the firm lowered the US’s sovereign long-term credit rating from 3 A’s to 2A’s due to their dissatisfaction with the Budget Control Act of 2011.