Kenya Rating Downgrade Signals Expensive Loans

BY BRIAN NGUGI
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• S&P Global Ratings has downgraded Kenya’s creditworthiness, reducing the country’s chances of finding cheap credit in the international market.
• The American credit rating agency downgraded its long-term credit ratings for Kenya in foreign and local currencies from ‘B +’ to ‘B’ to increase borrowing costs on insolvent government bonds.

S&P Global Ratings has downgraded Kenya’s creditworthiness, reducing the country’s chances of finding cheap credit in the international market.

The American credit rating agency downgraded its long-term credit ratings for Kenya in foreign and local currencies from ‘B +’ to ‘B’ to increase borrowing costs on insolvent government bonds.

“The government’s fiscal consolidation plan carries significant risks, while external debt will remain high. As a result, we are lowering our ratings for Kenya from ‘B +’ to ‘B’, ”S&P said in a press release.

The downgrade means Kenya’s Treasury Department will have to pay more to borrow money from foreign lenders.

A credit rating is used by sovereign wealth funds, pension funds and other investors to assess a country’s creditworthiness.

“It will be much more difficult for Kenya to borrow in the international market,” said Kunal Ajmera, chief operating officer at Grant Thornton, a consulting firm.

“Lenders will ask for higher returns and increase the cost of borrowing for Kenya. This, combined with the existing high credit levels, can create a significant deficit for future households.”

On the cut, S&P said the coronavirus pandemic has significantly slowed Kenya’s gross domestic product (GDP) growth and weighed on already weak public finances.

Kenya plans to borrow more foreign than domestic loans as it seeks cheaper preferential rates and lower interest rates. The gross new debt forecast by the end of June 2021 amounts to Sh 970 billion.

“A sharp slowdown in GDP growth in 2020 in connection with the coronavirus pandemic and a resulting increase in budget deficits will weigh on Kenya’s already weak public finances and external debt ratios,” said S&P.

The rapid rise in Kenya’s national debt in recent years signals an impending spike in debt servicing obligations, including interest and principal payments, the ultimate impact of which will be an increase in current spending and a decrease in development spending.

Typically, a country’s ability to pay off debt depends on the rate at which it is generating and growing tax revenue. Paris Club creditors agreed in January to grant Kenya a temporary suspension of debt servicing from January 1 to June 30, 2021.

The deferred repayment gave Kenya around Sh32.9 billion in potential savings for the six month period.

Kenya’s economy contracted 1.1 percent year over year in the third quarter of 2020, compared to a 5.8 percent growth over the same period in 2019.