Ratings agency cuts foreign currency bond risk premium

Kenya may find it cheaper to raise money from the international markets by issuing a sovereign bond following news that Moody’s - one of the world’s big international ratings agencies - is cutting the risk premium on countries floating foreign currency denominated bonds.

International ratings agencies have historically assigned less risk premiums to locally denominated debts, a factor that has made it cheaper for governments to borrow money from the domestic rather than international markets.

But an empirical research into sovereign default patterns by Moody’s Investors Service- one of the big international ratings agencies- has led the agency to conclude that there is rarely a case to differentiate the default and loss risk of local and foreign currency government debt.

The finding has as a result made local and foreign currency government rating gaps far less frequent.

The research has also outlined the specific criteria for maintaining such gaps in limited cases only.

“Moody’s current approach is to maintain rating gaps in selected cases only and subject to specific criteria,” said Tristan Cooper, a vice-president and senior credit officer in Moody’s sovereign risk group in a report published early this month.

The researchers identified a country’s capital mobility, resilience of the local investor base, existence of a balance of payments constraint, and a material difference between the government’s willingness and ability to service its debt in local versus foreign currency as some of the factors that would create gaps between the two sovereign ratings.

Kenya has an open capital account which gives investors the freedom to ship in and take out investment at will but Tanzania stands out as the only country in the region that is yet to fully open up its capital account.

“Kenya may benefit from the Moody’s research report because what it says is that sovereign ratings should not be significantly divergent if a country has been servicing its local currency debts,” says Edward Gitahi, a portfolio manager with AIG Investment (East Africa) Company.

The Credit Reference Bureau Africa Ltd operations director Wachira Ndege also said the potential to generate foreign currency inflows also influences a country’s foreign currency sovereign rating.

Kenya first announced a plan to tap into the international markets by issuing a $500 million (about Sh38 billion by current exchange rates) Euro bond in 2007.

The country contracted two international ratings agencies- Standard and Poor’s and Fitch- to assess its ability to service local and foreign debts.

But the Central Bank of Kenya (CBK) - which acts as Treasury’s agency for issuing public debt- shelved plans to float the sovereign bond following the political upheaval that came with the disputed presidential poll in early 2008 and the global financial crisis that followed thereafter.

Relative stabilisation

Fitch had given Kenya a long term ‘B+’ credit rating, a medium term ‘B’ credit rating and a ‘BB-’ local currency credit rating, while Standard and Poor’s gave Kenya a ‘B’ long-term and short-term sovereign credit rating in reviews that were last done in 2008.