Bad borrowing habits come to haunt Kenya

Moody’s review comes at a time when Kenya’s revenues have been eroded by the Covid-19 pandemic. [Stafford Ondego, Standard]

A global agency Moody’s yesterday changed the outlook of Kenya’s credit worthiness to negative, citing the country’s massive debt obligations.

By changing the outlook from stable to negative, the US-based rating agency has essentially raised a red flag on the possibility of Kenya defaulting on its debt.

The revision signals that Kenya’s B2 rating could be revised to B3, which would see it find itself in the company of fiscal miscreants such as Ghana which nearly defaulted on one of its external loans.

“Moody’s would likely downgrade the rating if it were to conclude that the ongoing deterioration in Kenya’s debt burden and debt affordability was likely to exacerbate liquidity risks, raising questions over the State’s ability to refinance maturing debt,” said Moody’s.

 It, however, maintained Kenya’s B2 status - a junk bond which is better than B3 - citing “fundamental economic strengths including a relatively large and diversified economy with high growth potential and quite deep domestic financial markets.”

Moody’s said it changed the outlook to negative due to the country’s huge debt obligations including pressure to spread out payment of its external loans and refinance (borrow to repay) short-term domestic loans.

“The negative outlook reflects the rising financing risks posed by Kenya’s large gross borrowing requirements, which include amortisation of external bilateral debt and the need to refinance large stock of short-term debt,” said Moody’s in a statement.

Kenya is also facing high exchange and interest rates, making it difficult to finance its budget. “While Kenya does not face acute financing pressures, the severe tightening of financial conditions will challenge its ability to meet larger gross financing needs without an increase in borrowing costs that would threaten medium-term fiscal consolidation,” explained Moody’s.

“Weaker growth and larger fiscal deficits will further aggravate Kenya’s already high-debt and interest burdens,” said Moody’s, reckoning that coronavirus outbreak is creating a severe and extensive credit shock across many regions and market.

Moody’s ambivalent position is anchored on expectations 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.

It expected Kenya to generally meet all its debt service commitments to private-sector creditors, who include commercial banks, hedge funds and pension fund who hold the country’s three Eurobonds.

Moody’s review comes at a time when Kenya’s revenues have been eroded by the Covid-19 pandemic, whose containment measures have muted most economic activities.

Moreover, the Government has offered some tax incentives which have seen it forego over Sh175 billion in revenues.

A negative rating would make it harder for Kenya to attract foreign investors who are keen to put their money in low-risk economies.

Moody’s announcement came a day later after Kenya’s forex reserves were boosted by Sh78 billion credit from the International Monetary Fund. They were to be used for the balance of payment requirements - such as paying debt and acquiring medical resources to fight Covid-19.

Kenya has been under pressure to reschedule domestic loans that will be falling due in 30 days, with the total public debt standing at Sh6.3 trillion by the end of March.

National Treasury Cabinet Secretary Ukur Yatani had not responded to our queries by the time we went to press.

 In 2017, when Moody’s indicated that it would cut Kenya’s rating from B1, the then Treasury CS Henry Rotich dismissed it as “desk analysis.”