Ratings agency cuts foreign currency bond risk premium

Kenya may find it cheaper to raise money from the international markets by issuing a sovereign bond following news that Moody’s - one of the world’s big international ratings agencies - is cutting the risk premium on countries floating foreign currency denominated bonds.

International ratings agencies have historically assigned less risk premiums to locally denominated debts, a factor that has made it cheaper for governments to borrow money from the domestic rather than international markets.

But an empirical research into sovereign default patterns by Moody’s Investors Service- one of the big international ratings agencies- has led the agency to conclude that there is rarely a case to differentiate the default and loss risk of local and foreign currency government debt.

The finding has as a result made local and foreign currency government rating gaps far less frequent.

The research has also outlined the specific criteria for maintaining such gaps in limited cases only.

“Moody’s current approach is to maintain rating gaps in selected cases only and subject to specific criteria,” said Tristan Cooper, a vice-president and senior credit officer in Moody’s sovereign risk group in a report published early this month.

The researchers identified a country’s capital mobility, resilience of the local investor base, existence of a balance of payments constraint, and a material difference between the government’s willingness and ability to service its debt in local versus foreign currency as some of the factors that would create gaps between the two sovereign ratings.

Kenya has an open capital account which gives investors the freedom to ship in and take out investment at will but Tanzania stands out as the only country in the region that is yet to fully open up its capital account.

“Kenya may benefit from the Moody’s research report because what it says is that sovereign ratings should not be significantly divergent if a country has been servicing its local currency debts,” says Edward Gitahi, a portfolio manager with AIG Investment (East Africa) Company.

The Credit Reference Bureau Africa Ltd operations director Wachira Ndege also said the potential to generate foreign currency inflows also influences a country’s foreign currency sovereign rating.

Kenya first announced a plan to tap into the international markets by issuing a $500 million (about Sh38 billion by current exchange rates) Euro bond in 2007.

The country contracted two international ratings agencies- Standard and Poor’s and Fitch- to assess its ability to service local and foreign debts.

But the Central Bank of Kenya (CBK) - which acts as Treasury’s agency for issuing public debt- shelved plans to float the sovereign bond following the political upheaval that came with the disputed presidential poll in early 2008 and the global financial crisis that followed thereafter.

Relative stabilisation

Fitch had given Kenya a long term ‘B+’ credit rating, a medium term ‘B’ credit rating and a ‘BB-’ local currency credit rating, while Standard and Poor’s gave Kenya a ‘B’ long-term and short-term sovereign credit rating in reviews that were last done in 2008.

CBK governor Prof Njuguna Ndung’u has said Kenya may revive the sovereign bond issue this year on the back of the relative stabilisation in international financial markets.

Buyers of sovereign bonds ordinarily rely on credit ratings of issuer countries from reputable international rating agencies, with the United States Sovereign rating being the market benchmark.

Moody’s observes in the report that capital account mobility has increased in recent years as domestic capital markets -- especially those in emerging economies -- have deepened and governments’ investor bases have broadened.

“Crucially, it is far more likely that problems servicing debt in one currency will spill over and affect a government’s ability to service its debt in another,” added Mr Cooper.

Though Kenya can easily raise the targeted $500 million -even going by this year’s domestic borrowing target of Sh109 billion- Prof Ndung’u has emphasised that issuance of a sovereign bond is supposed to market Kenya to international investors as a potential destination for foreign capital.

A sovereign bond sets a benchmark interest rate for international investors looking to invest in the global capital market.

“It makes a lot of sense for Kenya to push through with this bond offer, today we have a lot of liquidity in the domestic debt markets but this may not always be the case and an already established sovereign rating may help when the government wants to borrow externally,” said Mr Ndege.

Other African countries that have publicly announced plans to issue sovereign debts include Ghana ($300 million), Nigeria ($500 million), Tanzania ($500 million), Uganda and Zambia.

Gabon launched a debut global bond totalling $1 billion in December 2007 while Ghana issued a $750 million 10-year Eurobond in September 2007.