Credit rating downgrades add to Kenya's debt headache

A 3D illustration of a person escaping financial problems. [Getty Images] On Friday, global rating agency Moody's downgraded Kenya's rating one notch down, heaping more pain on the already battered economy. Moody's also maintained a negative outlook, meaning another downgrade could follow if the economy performs worse or government debt rises faster than expected. Analysts warned on Monday the downgrade would increase the country's already high borrowing costs and constrain its fiscal framework. Moody's cut Kenya's senior unsecured debt rating as well as long-term foreign-currency and local-currency issuer ratings to B3 from B2. "The rating downgrade is driven by an increase in government liquidity risks," the agency said. The agency added that Kenya's domestic funding conditions have deteriorated considerably over the past two months, with very low net domestic issuance contributing to financing shortfalls and delays in government spending. Moody's also said it had placed the latest ratings on review for downgrade, as external financing options for Kenya also remain constrained. Without access to international bond markets to refinance upcoming external amortisations, Moody's said it expects Kenya to rely primarily on concessional financing from multilateral financial institutions, along with commercial syndicated loans and borrowing from regional development banks, to meet its external financing needs. "Moody's Investors Service (Moody's) has today downgraded the Government of Kenya's long-term foreign-currency and local-currency issuer ratings and senior unsecured debt ratings to B3 and placed the ratings on review for downgrade," it said. According to Moody's, the rating downgrade is driven by an increase in government liquidity risks. A sovereign rating is used to assess a country's creditworthiness when it borrows from the domestic and international financial markets. It has an influence on the cost of borrowing. Moody's assessment comes weeks after Standard and Poor (S&P) cut Kenya's rating outlook from stable to negative on concerns about the country's debt servicing capacity due to constrained international market access and underperforming domestic bond issuances. Earlier, Global ratings agency Fitch also downgraded Kenya's credit rating, dimming the country's chances of tapping cheap credit on the international market. Fitch downgraded Kenya's long-term foreign-currency issuer default rating to 'B' from 'B+'. A credit rating cut is significant because it may influence a country's cost of borrowing in the international financial markets. The three agencies' stances reflected a growing concern that developing nations that have high exposure to external debt will struggle to refinance maturing issuances due to the high-interest rate demands being put forward by potential lenders. The latest ratings are likely to see Kenya restate calls for the reform of the global credit rating system, joining a growing chorus of regional countries and global bodies agitating for the overhaul of the global credit market. The move, they argue, would boost accurate assessments of African countries. This comes at a time Kenya is expected to come under more scrutiny from the credit rating agencies amid the risk of economic slowdown and mounting political uncertainty. The speculated rapprochement between the opposition chief Raila Odinga and President William Ruto is, however, tipped to lower political tensions if implemented. It also comes as the government prepares to confront a Sh1.25 trillion debt repayment headache from July 1 in a move expected to pile pressure on the Kenya Revenue Authority (KRA) to raise more funds for clearing the sovereign loans. Significant public debt repayment in the current financial year that ends in June of up to Sh930.4 billion has already exposed public coffers to debt distress and triggered unprecedented jitters of default risks. It means the debt repayment load will in the next financial year starting on July 1 jump by a third or Sh320.3 billion, setting up the cash-strapped Treasury for the additional strain. Debt repayment in the current financial year has exposed Kenya to higher interest rates at a time the global credit market conditions have tightened, limiting the country's borrowing window as the shilling has depreciated against the dollar and major currencies. KRA is expected to collect Sh2.57 trillion in the 2023-2024 financial year, 17 per cent more than the Sh2.1 trillion it is projected to collect over the current financial year. But it would be a gruelling task to hit the target in the remaining period amid a slowing economy, based on the recent trend of tax collections. This could mean the Ruto government is on the brink of missing its revenue collection target for the current financial year, which could morph into a financial crisis for the already cash-strapped government. The taxman is faced with the herculean task of collecting Sh535 billion in just 60 days, data from the National Treasury shows. KRA had collected Sh1.39 trillion by the end of March this year, earlier data showed. This means it collected Sh179 billion in the month of April. Going by the trend, it will be an uphill task to collect Sh267.5 in each of the remaining months meaning the Treasury could be left with the option of borrowing. Kenya has previously faulted the rating agencies for their assessments. Treasury Cabinet Secretary Prof Njuguna Ndung'u said recently regional countries are often adjudged wrongly by credit rating systems and agencies. The global credit rating system is dominated by three major US-based credit agencies - Fitch Ratings, Moody's Investors Service and Standard & Poor's. The big-three agencies have recently issued assessments on Kenya's credit rating. "We are all coordinated and, should I say, harassed within the same framework without actually any resort to what needs to be done," said Prof Ndung'u, alluding to the gaps in the global credit rating system. "Why do MDAs (Multilateral Development Agencies) follow those ratings? Are they giving them a tick?" he posed. The UN Economic Commission for Africa (UNECA) has been pushing for global credit rating system reforms as part of a complete overhaul of global financial architecture. African governments have often claimed that funds are loaned to regional countries at a higher rate of interest than other comparable countries. Some countries claim their creditworthiness also hinges on the decisions of opaque credit rating agencies. "There is an urgent need to reform the global financial architecture to level the playing field for developing countries," said acting Executive Secretary of the UN Economic Commission for Africa Antonio Pedro. Improving and maintaining good sovereign ratings is, therefore, seen as essential for managing public debt and attracting investors. The dominant global rating agencies have in the recent past slashed Kenya's credit ratings outlook, dimming the country's chances of tapping cheap credit in the international financial market. The Financial Standard could not immediately reach the rating agencies. A rating downgrade is significant because it may influence a country's cost of borrowing in the international financial markets. On its rating, Moody's in its assessment, said domestic funding conditions have deteriorated considerably over the past two months, with very low net domestic issuance contributing to financing shortfalls and delays in government spending. "While demand for domestic debt issuance will likely improve, it will remain sensitive to government economic policies, particularly related to fiscal consolidation, and external financing conditions, signalling overall government liquidity risk has increased," said the agency. "The initiation of the review for downgrade is prompted by the risk that the deterioration in Kenya's domestic financing conditions persists amid still constrained external financing options." Moody's also lowered Kenya's local currency (LC) country ceiling to 'Ba3' from 'Ba2,' maintaining a three-notch difference with the sovereign rating, which it said reflects relatively weak institutions and policy predictability and moderate political risk set against a relatively small footprint of the government in the economy and limited external imbalances. "Government financing conditions in the domestic market have deteriorated significantly since early March 2023, with weaker demand for government securities resulting in shortfalls in net domestic financing," it said. "Demand for Treasury bills has shifted toward the shortest-maturity Treasury bills, the 91-day bill. Demand for longer-dated bonds has also weakened, with very low demand at recent auctions, including a planned re-opening of a 15-year government bond which was cancelled in April." Moody's said because of the weak demand for government securities, the government has fallen behind its net domestic financing target for the fiscal year ending June 30, 2023 (the fiscal year 2023). "This is having a significant impact on Kenya's fiscal accounts; tighter domestic financing conditions contributed to the government's delay of some salary payments in March, ongoing delays in transfers to county governments, and to the stock of government arrears," it said. Moody's, however, expects some of the factors affecting the domestic market in recent months to ease, increasing appetite for domestic issuance. In particular, it noted, disbursements on external financing will support increased government spending, including the clearance of arrears, which would address several factors contributing to weak demand. "Domestic financing conditions are important for the government's financing strategy, which aims to raise the majority of net fiscal financing through domestic issuance," said Moody's. "The recent track record of lower domestic demand highlights the sensitivity to confidence in government policies and its ability to deliver on fiscal consolidation." In fiscal year 2024, the government plans to raise Sh521 billion. Moody's noted that given the demand for domestic debt in recent months, achieving this target will be challenging without a rise in borrowing costs or improved investor demand. As such, it warned lower domestic financing would require either a reduction in spending or increased reliance on external financing. "The tightening of domestic financing conditions comes amid an increase in external refinancing needs for the government," said the agency. External debt amortizations will increase to $3.5 billion (Sh479.5 billion) in the fiscal year 2024, from $1.6 billion (Sh219 billion) in the fiscal year 2023. This includes a $2 billion (Sh274 billion) Eurobond maturity in June 2024 as well as $650 million (Sh89 billion) to China EXIM Bank. "The increase in external debt payments comes at a time international reserves ($6.5 billion as of May 4) provide for import coverage of just 3.6 months, compared with international reserves that provided more than 5 months of import coverage prior to the Russia-Ukraine conflict," said Moody's. While external financing is anchored by an International Monetary Fund (IMF) programme and strong support from multilateral development banks, it is also contingent on the government's ability to deliver on fiscal consolidation. Without access to international bond markets to refinance upcoming external amortisations - the process of repayment of debt through periodic instalments over a period of time - Moody's expects Kenya to rely primarily on concessional financing from multilateral financial institutions along with commercial syndicated loans and borrowing from regional development banks, to meet its external financing needs. Beyond fiscal year 2024, the government will face amortisations of around 1.5 per cent of GDP per year over the next several years. This includes Eurobond principal payments of $300 million (Sh41.1 billion) per year between 2025 and 2027 before another $1 billion (Sh137 billion) principal maturity falls due in 2028.

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