Last week Fitch Ratings, one of the major global rating firms, revised Kenya’s credit rating outlook from stable to negative.
Fitch is not the only one that is concerned about Kenya's credit outlook. Moody’s and Standard & Poor's have also had their say in recent months.
Though these ratings have been dismissed as biased by some in government, they carry significant weight among global investors who don't have access to more personalised data and analysis.
This is why their verdict is critical for Kenya’s ability to attract funds in the global financial markets.
What does Fitch Ratings' revision of the outlook to negative mean?
Fitch Ratings simply revised the outlook on Kenya’s credit rating, or what they technically referred to as long-term foreign-currency issuer default rating (IDR) from stable to negative.
IDR is a measure of the borrower’s vulnerability to default on its financial obligations. The borrower can be a corporate or sovereign country.
Ratings by the three main rating firms are conferred in letter grades. Just like in academic grades, at the top are A grades (investment grade) while at the bottom are C and D, which are junk grades.
Kenya’s latest credit rating by Fitch is ‘B’ Negative, having been revised from ‘B’ Stable. Though this is still a safe territory, it has moved down to just two steps now above the default rating of D where Zambia is.
A 'B' rating is considered highly speculative. This means that although the issuer can meet their financial obligations, they are also vulnerable to adverse economic shocks.
One such shock that has hit Kenya is the shortage of dollars due to the hike in interest rates by central banks in advanced economies.
What is the effect of revising the credit rating outlook to negative?
It means that Fitch might downgrade Kenya’s credit rating in its next review if certain factors in the economy do not improve. A downgrade could see Kenya join countries with ‘substantial risks’ like Mozambique at CCC+.
The factors that could lead to the downgrade of a country’s credit rating include reduced inflows of foreign currencies to enable the country to meet its foreign currency obligations as they fall due.
The government is also expected to collect more taxes to avoid digging itself deeper into a debt hole. Credit rating is an attempt to help investors determine the risk involved in investing in or lending money to a particular borrower.
Therefore, a downgrade would send a wrong signal to potential lenders as it would imply an increased risk for the country to default on its financial obligations.
Foreign currency ratings, such as the one that Fitch carried on Kenya, refer to the ability of the borrower, or issuer, to meet its obligation on foreign currency-denominated obligations such as the dollar-denominated Eurobonds as they fall due.
On the other end, securities with a ‘stable’ outlook are considered to have a strong degree of safety regarding the timely payment of financial obligations.
Why did Fitch downgrade Kenya’s outlook to negative?
Fitch Ratings said the reasons for the revision of the outlook from stable to negative included the difficulty for the country to borrow from the global financial markets due to higher interests owing to the increase in interest rates as central banks in advanced economies tighten their monetary policies to combat runaway inflation.
A tight financial market also means that the country might struggle to refinance—borrow to repay—a $2 billion Eurobond that is maturing in June next year.
The Treasury, however, insists that it is well prepared to make this bullet payment.
Also cited as a reason for the revision is the weakening international reserves as more dollars are flowing out than into the country.
There is also the uncertainty in implementing the recently passed Finance Act 2023 which is a subject of court cases and social unrest.
What is Kenya’s credit rating history?
The three major credit rating agencies have been around for close to a century, but Kenya’s credit rating history is less than two decades old.
One of the individuals who shepherded Kenya into the credit rating arena is the current Central Bank of Kenya Governor, Kamau Thugge, as part of President Mwai Kibaki’s goal of weaning the country of donor support in favour of self-reliance.
Dr Thugge told the Business Daily in an earlier interview, that it all started with structural reforms that resulted in the improvement in the ease of doing business.
Given the ensuing good economic performance, Dr Thugge says in his resume, he persuaded the then Finance minister to agree to get Kenya rated by global credit rating firms Standard & Poor's and Fitch.
“My main intention was to bring international discipline in formulating and implementing our economic policies (especially macro-economic policies) as these ratings would provide an independent assessment of our economic performance,” said Dr Thugge.
Has Kenya’s credit rating improved over time?
Kenya’s first credit rating by Standard & Poor’s (S&P) was done on September 8, 2006. S&P then gave Kenya a credit rating of B+.
This has since been revised to an outlook of negative in the S&P last review on February 28, 2023.
Kenya was assigned a B+, equivalent to a B1 rating by Moody’s in 2012, which was the only rating agency to upgrade Kenya’s sovereign rating to B2 in 2018.
However, on May 12 this year, Kenya’s credit rating was downgraded deeper into junk territory by Moody’s. At a B3, six levels below investment grade, Kenya is at par with Mongolia and Angola. Moody’s also put the nation on review for another cut.
What does Kenya need to do to improve its rating?
The Treasury reckons that for Kenya to graduate to investment grade (BBB-) and attract cheaper debt from global markets, there is a need for actualising the long-planned fiscal consolidation; improvement of export sector performance and expanding foreign reserves accumulation.
There is also a need for the promotion of economic growth to boost GDP per capita and improve food production, access and affordability to lower and stabilise the consumer price index (CPI) and exchange rate.
Which countries have the best credit ratings?
Close to a dozen countries have an investment grade rating of AAA (excellent) in the case of S&P and Fitch and Aaa for Moody’s.
Lenders will give them money at a lower rate. These include Sweden, Singapore, Norway, Sweden, Canada, and Switzerland. Others are the Netherlands, Luxembourg, Australia, Denmark, Germany, and the US.
However, there are others at high risk of default or junk bonds. Such countries, which include Kenya, will struggle to attract cheaper financing.
But the worst cases are Zambia and Ghana which are already in default.
Criticism against credit agencies
Although the Government submits itself to being rated, it does not completely agree with the verdicts given by the agencies.
The National Treasury thinks that the credit ratings given by these firms are arbitrary.
"The variations in the credit rating scores of the three agencies show the influence of subjectivity and the perceptions generated in the qualitative analysis," says Treasury in one of its documents.
The Financial crisis of 2008 also opened a new front for the attacks as most of the businesses that collapsed had an investment grade rating by nearly all the rating agencies.
