Moody's downgrades Kenya's sovereign rating

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Today, Moody's, the ratings agency, unexpectedly announced the downgrade of the sovereign rating of the Republic of Kenya from B3 negative to Caa1 negative. This shift places Kenya into uncharted territory it has not previously encountered, aligning it with a growing number of African countries whose sovereign ratings fall below the B category.?

According to Moody's report, the downgrade was precipitated by the Kenyan government's withdrawal of the 2024 Finance Bill, which aimed to increase taxes to service the country and pay off its mounting debt. Additionally, the downgrade may have been influenced by the results of last week's treasury bond auction, which saw Kenya receive only 2.4% of the bids for the offered amount.

This situation is unprecedented for any country: last week, offering 20 billion Kenyan shillings in bonds with interest rates as high as 17%-18% and only managing to attract bids totaling KES 480 million, a mere 2.4%. Analysts monitoring the market suggested that many institutional investors were awaiting the government's response to the withdrawal of the Finance Bill and anticipating whether interest rates would rise to more profitable levels. With this downgrade, it is now likely that interest rates will increase.

For those tracking Kenyan treasury bonds and debt, it is worth recalling that two years ago, in late 2022, interest rates averaged around 12%-13% for long-term bonds and approximately 9% for short-term bonds and bills. However, after the current government assumed power, when they faced a maturing euro bond in 2024 among other challenges, interest rates and foreign exchange rates soared. By November 2023, interest rates had climbed to 18%-19% for long-term debt and 17% for short-term debt.

?While the exchange rate of the Kenyan shilling to the dollar reached as high as 163 KES per dollar, making business operations increasingly costly. Moody's had previously downgraded Kenya from B2 to B3 negative, which partially explains the spike in interest rates, though the country was still within the B rating category and managed to maintain some stability.

With the current downgrade from B3 to Caa1, we may soon see interest rates that make the previous 18% seem modest. The government's struggle to raise revenue through taxes, following the withdrawal of the Finance Bill, and its efforts to consolidate its affairs to reduce wastage, are occurring at a time when it could not even raise 10% of the offered amount for a long-term treasury bond. We may soon witness interest rates on Kenyan treasury bonds, or on all Kenyan debt, reaching as high as 21% or even 24%, as has been seen in other downgraded countries. Consequently, the risk of lending to the Kenyan government is set to become exceedingly high, and the cost of doing business in the country will likely soar. If sovereign debt interest rates reach around 23%, commercial debt to the private sector could climb as high as 30%. The Central Bank of Kenya's reaction in the coming weeks will be crucial, as any increase in the central bank rate could have a cascading effect.

We may begin to see certain actions taken, particularly in the commercial sector, where higher interest rates could force private entities unable to raise capital to go out of business, leading to job losses. Austerity measures may be necessary, resulting in reduced government spending and potential job cuts. Such measures impact the populace directly and are part of the effort to prevent further downgrades.

Looking at other countries that have experienced downgrades, Ghana, for instance, was downgraded in February 2022 from B3 to Caa1. At that time, Ghana's debt had reached nearly 80% of its GDP, a level Kenya is approaching with its current debt at around 74%. Ghana struggled to raise funds to sustain its economy, particularly after the removal of certain taxes in 2020 and 2021, which hindered its ability to service its debt. Following the downgrade, Ghana implemented austerity measures, including a "haircut" on its sovereign debt, which saw investors lose 25% of the value of their dollar-denominated assets. Interest rates in Ghana have since soared, making it extremely costly to do business, especially for the private sector, which faces borrowing rates of 40% and above. Ghana's experience serves as a cautionary tale for Kenya.

Nigeria, another country downgraded by Moody's to Caa1 in January 2023, has been struggling for the past 16 months to improve its rating without success. The impact on Nigeria's debt has been severe, with borrowing rates reaching as high as 27%. The country is grappling with a significant devaluation of its currency, the naira, and an investment climate at its lowest, all of which contribute to a high cost of living.?

These challenges underscore the risks Kenya faces if it does not manage its financial situation effectively and for which all eyes are now to the Presidency and his economic advisors on how best they manage the next phase of this country’s growth.

Will we see more austerity measures? More interest rates on Country’s debt? More interest rates on private sector borrowing?

Happy investing Everyone!