Kenya rating downgrade signals expensive loans

S&P Global Ratings has cut Kenya’s credit rating, dimming the country’s chances of tapping cheap credit on the international market.

The American credit rating agency lowered its long-term foreign and local currency sovereign credit ratings on Kenya to 'B' from 'B+' in a move that could raise borrowing costs for cash-strapped Treasury.

“There are significant risks to the government's fiscal consolidation plan, while external indebtedness will remain high. Consequently, we are lowering our ratings on Kenya to 'B' from 'B+',” said S&P in a statement.

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

A credit rating is relied upon by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of a country.

“It will be much harder for Kenya to borrow from the international market," said Mr Kunal Ajmera, the chief operating officer at Grant Thornton, a consultancy firm.

"The lenders will demand for higher yield and it will increase the cost of borrowing for Kenya. This, combined with the existing high borrowing level can result in significant deficit for future budgets."

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

Kenya plans to raise more money from foreign than domestic loans as it targets cheaper concessional and lower interest rates. Its projected gross fresh borrowing up to the end of June 2021 stands at Sh970 billion.

“A sharp slowdown in GDP growth in 2020 tied to the coronavirus pandemic, and a consequent rise in fiscal deficits, will weigh on Kenya's already weak public finances and external debt metrics,” said S&P.

Rapid build-up of Kenya’s public debt in recent years signals a looming increase in debt servicing obligations, including interest and principal payments, whose ultimate impact is to increase recurrent expenditure and a squeeze on development spending.

Ordinarily, a country’s ability to pay debt is dependent on the rate at which it generates and grows tax revenues. The Paris Club creditors in January accepted to provide to Kenya a time-bound suspension of debt service due 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 shrank 1.1 per cent year-on-year in third quarter of 2020 compared with growth of 5.8 per cent in the same period in 2019, amid the Covid-19 pandemic disruptions further squeezing Kenya’s revenue raising ability.