New law raises hopes for cheaper borrowing

A successful implementation of the new Constitution will open the taps for cheaper credit from international markets by lowering Kenya’s risk profile, in effect fuelling business growth and investments in infrastructure.

Analysts at business advisory firm Deloitte Eastern Africa said that credit drawn from international markets was comparatively cheaper, often at interest rates below five per cent compared to domestic sources including bank loans, government and corporate bonds, which attract rates above eight per cent.

“We can expect an upward revision of the country’s credit rating which will open avenues for Kenya to access more capital needed to speed up economic growth,” said Mr Sammy Onyango, the Deloitte chief executive.

Standard & Poor revised Kenya’s credit rating from B+ to negative in February 2008 following the post-election violence.

Soon after the power-sharing agreement that effectively ended the violence, S&P revised the rating upwards to B which is still five levels below the investment grade.

A positive view of Kenya would be enhanced if the new Constitution was implemented peacefully, Mr Onyango added.

“The structures in the new Constitution engender a strong governance structure that is likely to reduce corruption and improve the business climate,” he said.

A better credit rating would make it easier for the government to finance big ticket infrastructure projects that have contributed to a steady rise of the budge, which currently stands at Sh997 billion, in recent years.

A deficit of about Sh105 billion is to be raised from the domestic market.

“Things are looking up. Part of the setbacks were to do with the political environment. Now we have the supporting structures right,” Nairobi Stock Exchange chief executive Peter Mwangi said, adding that the exchange would set up a counter for companies with revenues of more than Sh1 billion in a year.

While Kenya is likely to benefit from a better credit rating, the government is not planning to tap the international debt market soon.

“The Eurozone crisis has made us reconsider our planned sovereign bond. Recovery in the US is also still shaky according to available data,” Mr Geoffrey Mwau, the Economic Secretary at Treasury told a recent meeting held to discuss public policy.

In the long run, however, the ability of the government and private sector to raise funds from international sources at a lower cost should ease the burden on the domestic money front that has always faced fears of higher interest rates and crowding out of private investors from the debt market as a result of huge government borrowing.

Analysts add that a positive political and business environment would help Kenya net more foreign direct investment (FDI).

The NSE plans a segment for small- and mid-capital companies within the next year amid hopes a new Kenyan constitution will provide stable conditions in east Africa’s largest economy.

Mr Mwangi told Reuters that 100 firms with revenues of more than Sh1 billion ($12.4 million) in annual revenue would be targeted to issue both equity and debt by 2015.

“We expect that segment will be more active than the main segment. We would like to have it up and running sooner, but 12 months is realistic,” he said.

The bourse has 55 listed companies. Total market capitalisation stood at Sh1.17 trillion on Tuesday, up from Sh1.15 trillion on Friday.

Companies will be able to issue both debt and equity.

Mwangi said most foreign participation on the NSE was from European and South African investors.

Kenya’s benchmark 20-share index rallied after voters endorsed the new Constitution this month, peaking at 4,674.31 points.

It closed on Monday at 4,574.50. Increased FDI inflows should create new jobs in the economy, boosting consumer purchasing power and lifting aggregate demand in the economy that should in turn power the overall economy in a multiplier effect.

More FDI is seen as key in reversing the high unemployment levels, estimated at 21 per cent among the youth, excluding those in those in colleges.

From a high of $729 million in 2007, Kenya’s stock of FDI dipped to $96 the following year and rose marginally to $141 million in 2009.

The country’s neighbours in comparison have performed better, with Uganda’s FDI levels progressively rising from $733 million in 2007 to $799 million last year.

Tanzania on the other hand has held steady at an average of $657 million in the past three years.