Economy

Kenya’s rating cut signals expensive foreign loans

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The National Treasury building. FILE PHOTO | NMG

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Summary

  • Global ratings agency, Standard and Poor’s (S&P) has lowered its outlook on Kenya’s economy to “negative” from “stable”, dimming the country’s chances of tapping cheap credit in the international financial market.
  • The agency pegged its decision on a projected significant slowdown on Kenya’s GDP growth this year due to the ravages of the Covid-19 pandemic.
  • Tuesday’s ratings downgrade by S&P is the third on Kenya’s economy by three different international agencies since May 7, underscoring the country’s diminishing odds of landing affordable credit from international lenders.

Global ratings agency, Standard and Poor’s (S&P) has lowered its outlook on Kenya’s economy to “negative” from “stable”, dimming the country’s chances of tapping cheap credit in the international financial market.

The agency pegged its decision on a projected significant slowdown on Kenya’s GDP growth this year due to the ravages of the Covid-19 pandemic.

"The negative outlook reflects Kenya's deteriorating fiscal and external position," said S&P in a statement.

"The negative outlook also reflects the risk of wider external financing gaps if funding from official lenders is not as forthcoming as we forecast."

It, however, affirmed the country's long-term foreign and local currency debt ratings at ‘B+/B’.

Tuesday’s ratings downgrade by S&P is the third on Kenya’s economy by three different international agencies since May 7, underscoring the country’s diminishing odds of landing affordable credit from international lenders.

Two other agencies, Moody’s and Fitch Ratings, downgraded Kenya’s credit outlook to negative from stable, on May 7 and June 19 respectively, citing the shock caused by Covid-19 pandemic to key sectors of the economy. Tourism and horticulture, foreign exchange earners and major employers are some of the sectors most affected by the outbreak-induced slowdown.

A rating downgrade is significant because it may influence a country’s cost of borrowing in the international financial markets.

"It will be much harder for Kenya to borrow from the international market," said 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."

Kenya is targeting to borrow a net of Sh347 billion from external lenders in the current fiscal year.