Weak rating to hurt Ruto's borrowing plan

President William Ruto speaks after launching projects in Chogoria, Tharaka-Nithi County, July 13, 2023. [Phares Mutembei, Standard]

Rising borrowing costs and tougher market conditions could see the embattled government struggle to refinance upcoming maturing debts. 

This is against a backdrop of the weaker credit rating by global rating agencies, signalling taxpayers will have to dig deeper into their pockets to service the planned loan amid tighter global loan market conditions.  

Global ratings agency Fitch became the latest agency to downgrade Kenya's credit rating outlook, dimming the country's chances of tapping cheap credit on the international market. 

A credit rating or outlook cut is significant because it may influence a country’s cost of borrowing in the international financial markets. This means the Ruto regime may have to hike taxes, cut spending or seek costly external commercial loans amid the ongoing economic crisis. 

"The revision of Kenya's outlook to negative reflects increased external financing constraints amid high funding requirements, including a $2 billion (Sh282 billion) Eurobond maturity in 2024, weakening international reserves, rising financing costs, and uncertainty regarding the fiscal trajectory, for example, due to execution risks of the announced tax hikes amid social unrest," said Fitch in its update. 

Fitch noted that this is likely to complicate the State's plan to service its debts.  This could deal a major blow to President William Ruto’s revenue collection plan to fund his costly campaign promises and bring down the cost of living.  

The potential looming financial crisis could also threaten Kenya’s ability to repay huge maturing debt obligations and also dent its ability to fund national programmes like health and education. 

"Sovereign external debt service (amortisation and interest) will rise sharply to $4.3 billion (Sh610 billion) in the financial year (FY) ending June 2024, including the $2 billion (Sh284 billion) Eurobond repayment due in June 2024, up from $2.8 billion (Sh355 billion) in FY23," said Fitch.  

"Our expectation that the global tightening cycle could maintain unfavourable market conditions into 2024 is a significant headwind for the authorities who plan to refinance the Eurobond in external markets." 

Facing trouble

On the home front, Fitch sees the government facing trouble raising money from the domestic market. 

The ratings cut come on the back of narrowing borrowing options that have locked the National Treasury out of both domestic and global capital markets, laying the ground for a looming debt crisis.  

The government separately missed its revenue collection target for the previous financial year that ended in June, piling pressure on the cash-strapped Treasury.  "The sovereign's inability to access international markets in recent years has increased its reliance on domestic financing, putting upward pressure on interest costs, especially as monetary authorities began to raise interest rates in 2022," said Fitch in its update. 

"Frequent undersubscriptions of government securities combined with revenue collection shortfalls have contributed to the accumulation of public sector pending bills (estimated 3.8 per cent of GDP at end-March 2023)." 

Fitch assumes that the State will meet its financing obligations in the current financial year through a combination of official lending, syndicated loans and a drawdown in reserves. 

Kenya is already eyeing Sh137 billion in IMF disbursements, $1.9 billion (Sh270 billion) in project loans from official creditors and plans to continue tapping syndicated loans. 

Fitch made its assessment months after Moody's slashed Kenya's credit ratings.  Treasury revealed recently it is considering tapping into the international capital markets with a fourth Eurobond issue in less than a decade to help pay off part of its debt obligations. Kenya is, however, likely to set itself up for costlier debt if it implements the Eurobond plan in the near term. This means investors willing to buy the Kenyan bond in the international market will demand a risk premium to cushion against the risk of default. 

Treasury is banking on the controversial Finance Act 2023, which has hiked taxes on fuel, housing and digital content to mobilise additional revenues in the face of rising debt repayments such as the maturing Eurobond. But the tax measures in the Act have drawn sharp criticism from ordinary Kenyans and various interest groups as well as the Raila Odinga-led opposition coalition, arguing the cost of living is already too high, leaving no room for additional taxes. 

The Standard could not immediately reach Treasury for comment.

But National Treasury Cabinet Secretary Njuguna Ndung'u has recently said regional countries are often adjudged wrongly by credit rating systems and agencies.