Moody’s says Fed rate raise poses threat to Kenya

Kenya is amongst countries most vulnerable to an increase in interest rates by the Federal Reserve, rating agency Moody’s says.

The hike of the US benchmark rate, now set to be delayed from being effected this month, is expected to push up returns on dollar-denominated assets, which could make Kenya’s planned Sh83 billion in commercial loans for the 2015/16 fiscal year come at interest rates stiffer than that paid for Eurobond last year.

Moody’s said sub-Saharan Africa (SSA) faces vulnerability because of its large deficits and significant financing requirements. Kenya faces a current account deficit of nearly 10 per cent of the gross domestic product and a fiscal deficit of 8.7 per cent.

To finance the fiscal deficit the country has to attract external borrowing while the current account deficit requires that it gets dollar-denominated inflows.

“With an interest rate increase in the US still on the near horizon, especially vulnerable are those SSA countries running large current account deficits that are not fully financed by a combination of foreign direct investment and official flows, as well as large fiscal deficits that are partly reliant on external financing,” said Rita Babihuga, assistant vice president at Moody’s.

Ms Babihuga, who is also the author of the report, said beside Kenya, Ghana and Mozambique were the other most vulnerable African economies.

“Ghana, Mozambique and Kenya are among the most vulnerable African economies due to tighter external financing conditions stemming from a US rate rise. Zambia and Uganda also have moderate levels of exposure,” she said.

Last week, there were indications that the Fed would delay the increase as global economy tottered. The news came as relief for most currencies with the South African rand rising one per cent. But a rate rise is not thought to be far off.

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Last year, Kenya raised Sh290 billion ($2.75 billion) from a Eurobond through five- and 10-year tenors at a time interest rates in western countries were close to zero per cent.

In the first tranche of Sh211 billion ($2 billion) concluded last June, the five-year tenor went for 5.875 per cent while the 10-year tenor was offered at 6.875 per cent.

When the bond was re-opened last December to raise Sh79 billion ($750 million), the portion with a five-year maturity was auctioned for five per cent while the other with a 10-year maturity was sold for 5.9 per cent.

Besides the high chances of paying stiff interest rates on the planned bonds, Kenya’s stock market could lose more value as foreign investors make a beeline out of the country.

The Nairobi Securities Exchange has already been on a declining trend, having fallen over 17 per cent compared to the beginning of the year.

Any departures from Kenya’s financial markets sees foreign currency outflows with even more adverse consequences for the value of the shilling. So far this year, the Kenya shilling has lost 13.9 per cent of its value relative to the green back.