African countries are expected to enjoy friendlier terms when borrowing to finance budget deficits this year as regional and global central banks ease their monetary policy, reducing debt affordability concerns for countries such as Kenya that have large upcoming payment obligations.
Global ratings agency Moody’s says that the expected lower interest rates have seen it revise its sovereign credit fundamentals outlook (different from a ratings outlook) for Sub-Saharan Africa (SSA) economies to stable, from negative last year.
The softening of its outlook comes as a majority of central banks in the region continue to cut rates, with the Central Bank of Kenya (CBK) having reduced its policy rate by 1.75 percentage points since last August —among the fastest pace of easing in the region.
Globally, major central banks have also cut rates, most notably the US Federal reserve which reduced its rate by a cumulative one percentage point in three meetings between September and December, to a range of 4.25-4.5 percent.
According to Moody’s, the domestic and global cuts will help improve financing conditions, even though they will remain more difficult compared to the pre-Covid period.
“Financing conditions for Sub-Saharan Africa sovereigns will improve in 2025, on the back of monetary policy easing at the global and regional level,” said Mickaël Gondrand, assistant vice president and analyst at Moody’s Ratings.
“The reopening of the Eurobond markets for SSA sovereigns since the start of 2024, after two years of exclusion, has widened financing options for those with policies that credibly facilitate debt sustainability.”
For Kenya, domestic interest rates have already started to come down in response to the base rate cut. Treasury bill rates have fallen by between 5.5 and 7.4 percentage points since October, and bond yields are now in the 12-15 percent range from a high of 19.5 percent in September.
On the external borrowing end, the government issued a $1.5 billion Eurobond in February last year to fund a partial buyback of the maturing 10-year, $2 billion Eurobond that was contracted in June 2014. Interest on the new Eurobond stood at 9.75 percent, compared to a rate of 6.785 percent on the maturing paper.
The transaction reflected the higher refinancing cost faced by African economies for their dollar denominated debt at a time when rates were still elevated in the US and the EU, and cuts were still months away.
The subsequent easing in these economies has therefore raised hopes of cheaper borrowing costs for those going to the market in coming months.
This year, Kenya is looking at an expenditure of $4.15 billion (Sh537.94 billion) in external debt payments (principal plus interest), which is inclusive of an $300 million (Sh38.9 billion) partial principal repayment in May on a $900 million tranche of a Eurobond issued in 2019.
The Treasury is therefore likely to dip into the external debt market to raise funds to fund the debt service, as well as raise new funds for budgetary support.