The Treasury’s plan to access international markets for funding through a sovereign bond received a shot in the arm following an affirmation of Standard and Poor’s B+ rating for long-term foreign borrowing and a B rating for short-term local currency borrowing.
S&P assigned a “stable” outlook based on expectations of fair economic growth, falling inflation and a bet that the March 2013 polls will be peaceful.
A triple A (AAA) rating is the highest awarded to the most economically and politically stable countries enabling them to access cheaper funds from international markets. S&P indicated that it expects the Treasury to source for funds beyond the Kenyan domestic market.
“Given that net foreign direct investment (FDI) and portfolio equity inflows rarely amount to more than 25 per cent of the current account deficit, Kenya continues to rely heavily on external borrowing from both official and commercial sources,” said the rating agency in a statement released on December 20.
The Treasury has preferred to increase the rate of tax collection while filling funding deficits with local borrowing, but has avoided donor funding in recent years. This approach worked well until last year when interest rates shot beyond 20 per cent in a span of six months.
“As a consequence, the government contracted a syndicated loan from foreign banks (amounting to $600 million (Sh51 billion) or 1.5per cent of GDP) in May 2012. Financing pressures in the domestic market have eased in 2012, in line with more moderate inflation growth,” said S&P.
Economists said that the policy of increasing tax collection and borrowing locally had weaned the country off donor aid with a fair amount of success. Samuel Nyandemo, an economics lecturer at the University of Nairobi, said external borrowing is expected since Kenya’s economy is still developing.
“In an election year a lot of resources will be pumped in those activities and we may have to borrow internationally or internally,” said Dr Nyandemo.
Caution should be taken if Treasury officials settle on foreign debt over local debt due to the high exposure to high financing costs and foreign exchange fluctuations, added Dr Nyandemo.
Setting up county governments and other institutions after the March 2013 will also inflate funding pressures.
Overall S&P expects that the economy will improve but was explicit that Kenya’s rating will be downgraded if there is no peaceful transition and the shilling weakens.
“We could lower the ratings if political tensions flare up, significant currency pressures re-emerge, or fiscal or monetary performance deteriorate significantly,” said the rating agency.
Lower ratings would also be felt by mortgage takers and companies that are borrowing from abroad, which is gaining popularity.
Housing Finance, Equity Bank and KCB are some lenders who have borrowed from international markets for onward lending to Kenyan firms and individuals. Firms ordinarily borrow at a higher rate than the government which is deemed to be the highest rated borrower. “We could lower the ratings if political tensions flare up, significant currency pressures re-emerge, or fiscal or monetary performance deteriorates significantly,” said S&P.
Other rating agencies have also given Kenya a stable outlook but also raised concerns about the high public debt levels. In November rating agency Moody’s Investors Service gave Kenya a stable or B1 rating for issuing a foreign or local currency debt while Fitch Ratings affirmed Kenya’s rating at B+ or a stable outlook in August.
Source :businessdailyafrica.com
