Why sovereign credit rating matters

These steps should lessen the speculation about the ability to pay, that plagued Kenya in late 2023.

That speculation had adverse effects on the exchange rate, sending the shilling tumbling to nearly 160 to the US dollar before current recovery. Exchange volatility is a serious risk.

It translates to high prices of all Kenyan imports. Some, like petroleum hit pockets directly through pump prices, but also through secondary effects, pushing cost of living ever higher.

During the 2023/24 episode, most matatu fares went up 10-15 percent.

The success of these liability management operations was blunted by higher cost, the result of Kenya’s deteriorating sovereign credit rating.

After the 2024 Finance Bill collapsed, Kenya was downgraded from B to B- continuing the trend from the previous year. As a result, the 2025 bond was issued at 9.5 percent, up from 6.875 and 7 percent interest on the 2024 and 2027 maturities, respectively.

The higher interest rate means $90 million (equivalent to Sh11.7 billion) more in interest costs per year. This is equivalent to two years of Laikipia County’s equitable share.

That’s not all. When Kenya’s rating was downgraded in 2024, the same fate befell leading banks, among them NCBA, I&M and KCB, on account of the now increased sovereign risk component. As a result, their cost of capital rose, putting upward pressure on the interest rates they charge borrowers.

Sovereign credit ratings in Africa are dominated by three western based credit rating agencies.

This is because countries get rated as part of accessing eurobonds. There are, however, at least eight African based and managed credit rating agencies including Metropol CRA, Agusto & Co, CARE Rating, Premier Rating, DataPro and Beacon.

The Africa Peer Review Mechanism (APRM), implementing an Africa Union mandate, is spearheading the formation of the African Credit Rating Agency. They have indicated preference for an agency substantially owned and managed by the private sector.

Read:  Why Africa wants fair credit rating

The Africa Credit Rating Conference held in Cape Town last week, debated whether the African agencies are in competition with the western based agencies, or can exist in collaboration. Drawing on lessons from European and the Brics efforts to promote credit ratings appropriate to their regions, it was clear that deep local knowledge is essential.

The second in as many years, the conference had 150 delegates from among pension funds, fund managers, securities exchanges, central banks and ministries of finance.

There were investment bankers, academics and technocrats from UNDP, APRM, and ECA. Safaricom, Africa’s leading fintech, was in the house, as were several leading African DFIs – East Africa Development Bank, Development Bank of Southern Africa, and Africa Trade and Investment Development Insurance .

Suggested as a way to create credibility, one idea is for credit rating agencies to demonstrate the predictive power of their ratings by matching the credit outcomes of rated entities with the rating at the time when the credit was made.

Only two African countries are currently rated as investment grade, yet Africa has some of the fastest growing economies in the world.

These facts fuel accusations of bias in the ratings and create difficulties for Africa’s leading companies. It is only in limited circumstances that corporate entities can break the sovereign ratings ceiling, such as when they have strong cash flows offshore that can be securitised, or when a monetary union reduces currency risk.

Credit ratings play a crucial role in domestic finance, speeding up, and aiding investment appraisal. They also provide a measure of investor protection through mandatory periodic review.

The conference urged African institutions to use the ratings, with regulators focusing on opportunities rather than gate keeping. Even with five credit rating agencies, ratings uptake remains low in Kenya. One explanation is that the outcomes of the ratings are not well understood or known. The rated entities don’t always get the rating they expect, suggesting awareness creation is necessary.

Sovereign ratings are not just for eurobond purposes. Nigeria’s dollar denominated $500 million bond, issued and listed locally in August 2024, is a good example. Further, issuers should target African pension funds, estimated at $1.2 trillion.

Ndiritu Muriithi is an economist and partner at Ecocapp Capital.  He is also the chairman of KRA and former governor of Laikipia County. Email: [email protected]