Terror risk exposes Kenya to expensive Eurobond

Kenya’s creditworthiness, which is expected to determine the pricing of the upcoming sovereign bond, will be hit by the risk of further terror attacks and unpredictable weather, a new report from rating agency Moody’s says.

The B1 rating — standing for stability — will also be affected by weak inflows of foreign direct investment (FDI), infrastructure shortfalls as well as the twin deficits as shown in the large import-export value gap and budget shortfalls.

Kenya trails its neighbours in attracting FDI while its current account deficit (or the import-export gap) stands at nearly 10 per cent of GDP while the budget deficit is upwards of eight per cent against an East African Community monetary union recommendation of a six per cent ceiling.

Moody’s alert comes as Kenya prepares to start marketing the Eurobond of up to $2 billion this month, whose successful issue is expected to put downward pressure on local lending rates.

“A precarious regional security situation – starkly highlighted by a Somali terrorist attack at Nairobi’s Westgate Mall in September 2013 — could further impair investment and tourism,” said the rating agency.

Kenya has suffered a series of attacks blamed on Somali al Shabaab rebels including the assault on the upscale shopping mall where at least 67 people were killed.

Five people died while scores were injured following a Sunday gun attack on a church in Likoni, Mombasa County last weekend.

A degraded credit rating could see Kenya pay a higher price for the bond. Kenya’s initial debut Eurobond in 2007 was scuppered by post-election violence which crippled the economy and dented investor confidence.

Record high

International bond issuance by African countries hit a record high in 2013 as foreign investors sought higher yields among fast-growing economies such as Rwanda and Ghana.

The rating firm said that devolution which had been introduced under the 2010 Constitution presented both risks and opportunities since it had implications for financial stability and effectiveness of government.

Moody’s said devolution “represents both risks and opportunities for government effectiveness and financial stability, against a background in which the government and external finances are already strained by large twin deficits.”

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Construction of roads, railways, ports and increasing energy output and quality have also been regularly cited as positive for the business environment and economic growth. The World Bank has noted that the port of Mombasa as a major cost of doing business in Kenya.

“Moody’s says that the main risks to the rating stem from significant infrastructure shortfalls, intermittent drought and weak inflows of foreign direct investment, which if addressed could raise growth further,” the rating firm said in a statement.

The agency saw Kenya as still having weak institutions, but said they are strengthening. The country has recently undertaken reforms in such areas as public finance, the judiciary and the police, among others.

The rating agency’s report was an update to the markets and did not constitute a new rating action.

Moody’s added that the reform path the country was undertaking was already bringing some benefits as seen in such areas as improved infrastructure.

“Moody’s points out that structural reforms undertaken in the past four years underpin the B1 rating and are reaping benefits across a multitude of areas,” the agency’s statement said.

The agency said the recently concluded IMF Extended Credit Facility “was notable for Kenya’s near-spotless record of compliance with the programme’s criteria and targets.”

The IMF said that Kenya had broadly remained on the reform path, improved the economy, maintained foreign exchange reserves, achieved a low inflation target and a generally had a stable macroeconomic environment.