The Africa Credit Rating Conference, originally planned for March is now set for May 21 and 22 in Cape Town. It is the first joint effort between public and private sectors.
This is an important development because so far, the discourse on credit ratings has largely focused on sovereign entities. African Heads of State have repeatedly lamented that their countries are receiving lower than deserved scores, hurting their efforts to raise capital in the global markets.
Governments have turned to the African Peer Review Mechanism (APRM), and Economic Commission for Africa (ECA), to remedy the situation. The two agencies have been working on the technical side, tracking sovereign ratings, providing technical assistance to member states on how to work with ratings agencies, and hosting expert talks on the matter.
At the AU summit last February, the two institutions hosted a presidential breakfast on establishment of the African Credit Rating Agency.
The event brought together African Heads of State and other stakeholders, to discuss the continent’s financial fortunes and how they are tied to credit rating outcomes.
Although sovereign ratings have a major impact on corporates, there has been muted action by the private sector. Sovereign ratings act as a ceiling for corporate ratings.
Research shows that sovereign ratings are weighted more than company specific variables in assigning credit risk ratings to corporates. When the sovereign is poorly rated, the corporates suffer similar fate.
Three of Kenya’s leading banks found themselves on the receiving end last year.
On August 15, 2024, Fitch Ratings announced that it had downgraded the Long-term issuer default ratings (IDRs) of three domestically-owned Kenyan banks - KCB Bank Kenya Limited, NCBA Bank Kenya Plc and I&M Bank Limited - and their bank holding companies to ‘B-’ from ‘B’, with stable outlooks.
Further, Fitch revised the outlook on foreign-owned Stanbic Bank Kenya Limited’s (SBK) Long-term IDR to stable from negative and affirmed the IDR at ‘B’.
These actions followed the downgrade of Kenya’s Long-Term IDRs to ‘B-’, outlook stable, from ‘B’ on 2 August 2024. The sovereign downgrade, Fitch said, reduced the viability ratings (VRs) of the banks to ‘b-’ from ‘b’, reflecting the issuers’ high sovereign exposure relative to capital and the concentration of their activities in Kenya.
The downgrades of KCB Bank and NCBA Bank were also driven by the downgrades of their government support ratings to ‘b-’ from ‘b’, which reflected the government’s weaker ability to provide support, if required, as indicated by the sovereign downgrade.
The affirmation of Stanbic Bank Kenya’s Long-Term IDR, now one notch above the Kenya’s Long-Term IDRs, reflected Fitch’s view that the bank would retain its capacity to service its obligations in case of a Kenyan sovereign default and that no restrictions would be imposed by Kenya’s government to prevent SBK doing so.
This, Fitch said in their dispatch, was due to the bank’s intrinsic strength, as indicated by its viability rating of ‘b’, and potential shareholder support, as indicated by a shareholder support rating (SSR) of ‘b’ (the level of Kenya’s Country Ceiling), both above the sovereign Long-Term IDRs.
The long-term issuer default risks of KCB Bank and NCBA Bank were underpinned by a limited probability of government support, if required, as expressed by their GSRs of ‘b-’. Fitch’s believed that government support would be unlikely, given its low systemic importance and liability structure of these banks – a surprising conclusion given the role of these two banks in mobile money.
There were no significant negative changes in fundamentals driving the ratings downgrades. Indeed, KCB went on to post a 64.9 percent growth in after tax profit for 2024. I&M’s after-tax profit grew 22 percent for the same period.
Rather, the downgrades were based on Fitch’s view that the withdrawal of the Finance Bill 2024 increased risks to Kenya’s public finances, and the rating agencies’ lack of confidence in the Kenya governments’ ability to rescue the banks, should such an eventuality arise!
It is this reliance on views, rather than data driven documented changes in economic fundamentals, that African political and corporate leaders want to change. With good reason.
The resultant credit ratings lead to significantly higher financing costs. To make progress, governments and corporates must work together or continue to hang separately.
Which leads us back to the Cape Town conference. For the first time, Africa’s private sector is strongly in the room, raising the prospect of joint action.
Ndiritu Muriithi is an economist and partner at Ecocapp Capital. He is also the chairman of KRA and former governor of Laikipia County. Email: [email protected]
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