Global credit ratings agency Fitch has downgraded Kenya’s sovereign rating to ‘B-‘ from ‘B’ on heightened fiscal risks to Kenya’s public finances after the government dropped tax measures in the Finance Bill 2024.
- •The plan to raise US$2.7 billion extra in the estranged Finance Bill 2024 following a recommendation by the International Monetary Fund (IMF) was cut short after deadly protests.
- •The government subsequently announced spending cuts to cover the fiscal deficits.
- •Fitch notes that foreign exchange reserves fall below the ‘B’ median on account of high external borrowing costs hence greater risk to external financing.
The American ratings firm anticipates a widening of the fiscal deficit to 4.7 percent of GDP in the financial year ending June 2025 (FY25), 0.5 percentage points higher than the government’s new deficit plan which was revised up by 0.9pp in the July draft supplementary budget.
Revenue inadequacy has borne more expensive borrowing from external commercial creditors and the domestic market with average yields on short-term government papers surging, reflecting higher central bank rates and domestic liquidity constraints.
“We consider the risk of prolonged social unrest remains, significantly complicating the environment for fiscal consolidation and presenting downside risks to economic activity.” Fitch noted in the report.
Fitch however maintained a stable outlook for Kenya owing to the continued strong official creditor support which will help alleviate near-term external liquidity pressures notwithstanding the sovereign’s funding needs will remain large and are expected to rise.
“Kenya’s rating is supported by continued reforms anchored by the current IMF programme, and strong broad-based medium-term growth prospects.”added the report.
While the banking sector remains well-capitalized and profitable, asset quality has deteriorated, with non-performing loans rising to 16.1% of total loans in April 2024 from 15.5% in February 2024. Further, exposure to government securities remains high, double the sector’s total equity.
In July, Moody’s pushed Kenya further into junk following the withdrawal of the revenue plans by President Ruto, with S&P expected to make key rate changes by 23rd August 2024.
Why Moody’s Downgraded Three Banks
Moody’s Ratings has also downgraded the long-term deposit ratings of KCB Bank, Equity Bank and Co-operative Bank of Kenya, to Caa1 negative from B3, on weakened government credit profile in the second week of July.
KCB, Equity and Co-operative bank, Moody’s says, have high exposures to the sovereign through their holding of government securities standing at around 2.5, 2.4 and 1.6 times their tangible common equity as of March 2024.
High problem loans stood at 18.9%, 14% and 14-5% of gross loans respectively, reflecting high asset risks coupled with weakening asset quality. According to Q1 2024 results, the three listed lenders increased their investments in government securities by 40%, 16% and 12% respectively.
Contrastingly, Standard Chartered, Absa, NCBA, DTB and Stanbic scaled down on their government securities pointing to potential adjusted portfolio to mitigate risks arising from the government’s tight liquidity position notwithstanding the favorable interest rate environment.
“The banks’ high sovereign exposure, mainly in the form of government debt securities held as part of their liquid assets, renders the banks’ capital, profitability and liquidity vulnerable to a sovereign stress event. In view of these links between sovereign and bank credit risk, these banks’ standalone credit profiles and deposit ratings are constrained by the Caa1 rating of the government” Moody’s said.
Further, Moody’s noted that Kenyan households and corporates are affected by high lending rates and tight monetary conditions which translated to tax hikes and reduced spending.
Kenyan banks continue to face headwinds in the operating environment which led to elevated asset risks marked by significant increases in Gross non performing loans.
“The concentration risk alluded to is not, at least in my view, as prominent for the affected banks. For instance government holdings comprise just about 23% of total assets in KCB Kenya, 24.7% in Equity Bank Kenya and 27.0% in Co-op Bank Kenya – all below the 30% mark. Additionally, the continued implementation of IFRS 9 provisioning continues to afford considerable buffers for the banking sector.” Ronny Chokaa, Senior Research Analyst at AIB-AXYS Africa said while speaking to The Kenyan Wallstreet.
In the year ended 31st December 2023, total gross NPLs in the banking sector stood at KSh 651 billion from KSh 503 billion a year prior.
Credit ratings hold tremendous weight among global investors who may not have enough access to Kenya’s domestic market as they decide whether to invest or divest from the country considering the risks involved.
“The move is however likely to affect future capital-raising initiatives for the firms including debt financing – piling pressure on borrowing costs over the medium term. On the equities side however, I expect trading activity on these counters to remain resilient despite the adverse rating,” he concluded.
