High debt, data gaps drag Kenya’s credit rating — new reform plan launched

Veronica Kalema, Pratik Patel and Raymond Gilpin in Mombasa on Monday / BRIAN OTIENO

Kenya is currently in the non-investment grade rating meaning it is considered to have a high default risk.

Although this does not mean the country is imminently going to default in paying its debts, it means the country has to pay its debt more expensively because of the higher risk investors face when issuing bonds.

For investors, Kenya’s margin of safety is thinner thus they have to offer their bonds at a higher price because of the risk factor.

However, the United Nations Development Programme through strategic partnerships with institutions like AfriCatalyst, has initiated mechanisms to help Kenya improve its credit rating and move it from the non-investment grade rating.

“We bring these partnerships together because we want to afford Kenya, most effectively and efficiently, with the best minds in the business of credit ratings in Africa. It is preparation to get Kenya from where it currently is, non-investment grade, to investment grading in the not too distant future,” Raymond Gilpin, UNDP Africa’s chief economist, said on Monday.

He spoke during the week-long inaugural inter-agency retreat on sovereign credit rating in Mombasa, which brings together senior officials from various Kenyan agencies, development partners and top economists who can advise the government on what needs to be done.

“Over the next few days in this workshop we will be developing an action plan that would articulate what Kenya needs to do, what Kenya’s development partners need to do, and what the path would look like from current non-investment grade to investment grade shortly,” Gilpin said.

He said Kenya has insufficient data to inspire confidence in investors in the country’s investment environment.

In 2023, the UNDP did a study that looked at development financing across Africa and found out a number of reasons why a number of African countries find it difficult to get the resources they need to invest in their future.

“One of these reasons is the fact that when an investor looks at a country like Kenya, they see risk,” Gilpin said.

There are many indicators that make a country risky.

“In a data-scarce environment like Kenya, the primary signal that the market sees is the credit rating. In many African countries, Kenya being no exception, those credit ratings don’t really portray the country’s capacity to repay debt in the future,” Gilpin said.

He said in many instances, this is not because the methodologies are weak but because African countries at times are not as prepared as they should be, have scarce data available, or the data available is not timely and credible.

Gilpin said many times, many people in decision-making positions in government do not understand the credit rating process and they treat it as the usual economic assessments.

“No. It is different. Credit ratings are a future-leaning assessment,” the chief economist for Africa said.

UNDP’s Africa Credit Rating Initiative has three components including high-level advisors who advice governments on what to do to improve credit ratings, building of capacity through workshops and help in understanding the kind of data that tells one’s investment story, and having strategic partnerships including AfriCatalyst.

Veronica Kalema, a senior advisor with the UNDP-AfriCatalyst Credit Ratings Initiative, said credit rating gives an assessment of the country’s ability and willingness to repay its debt.

“For Kenya, one of the risks, which affects its credit rating, is the high debt, which is at 70 per cent of the GDP,” Kalema said.

However, she said this can be brought down.

“The government is implementing policies to bring it down, reduce the risk, and reduce the cost of borrowing. That is ongoing,” she said.

According to Moody’s Rating, Kenya’s sovereign credit rating was upgraded to B3 (stable) on January 27 up from Caa1 due to reduced default risk, stronger foreign exchange reserves, and improved access to financing.

Fitch Ratings also affirmed a B- rating with a stable outlook on January 23.

Prior to this, Kenya was downgraded to Caa1 in July 2024 following the fiscal policy, or the “Finance Bill” unrest.

Kalema said reducing debt involves a lot of different factors in the economy including improving growth, improving tax collection, supporting the business environment, among other things that interact to improve the rating.

Gilpin said when assessing the ability of a country to repay its debt, one looks at the country’s revenue, how it trades, how it manages it macroeconomic fundamentals, how the banking system is doing, among others.

“There are other alternative data sources, including how conducive the business environment is for small businesses. And when those data is not available, people have to guess and make estimations,” Gilpin said.

“For us, the immediate priority, the low hanging fruit is the data.”

Pratik Patel, the East and Southern Africa bureau chief for AfriCatalyst, said they partnered with UNDP since 2024 because they believed there was a fundamental crisis at play.

He said there is a direct link between credit rating and the effect on the people in a country.

Credit ratings, he said, affects ability of a country to access international markets financing and its affordability.

“What that means for us (Kenya) is that cost of borrowing us higher. It also means that the amount of our revenue as Kenya that gets spent on repaying debt is more. The amount used in investment in hospitals, schools, education and other productive initiatives become reduced because we spending so much of our money repaying debt,” Patel said.

He said Kenyan agencies need to understand how credit rating agencies come up with the ratings so as to better prepare for and plan how to avoid poor credit ratings.

“I wouldn’t say it’s going to be an overnight process. In fact, some of the pathways may be slow and challenging but it’s worth doing because the cost of inaction and the cost if under-preparedness would be felt most by the underprivileged in our society,” Patel said.

INSTANT ANALYSIS:

AfriCatalyst is doing solid awareness raising and capacity strengthening for Kenya and other African countries on credit ratings so as to improve their credit ratings and gain access to cheaper financial markets. The institution says the information gap on credit rating also need sto be filled.