Investor Confidence in Kenya Takes a Nosedive

Weekly Market Snapshot

• Negative Credit Rating Compound on Kenya’s Macroeconomic Misery as Debt Servicing Situation Worsens

Behind the Headlines: What Happened?

Investors’ confidence plummeted in Kenya over allayed fears of compounded woes in the Kenyan macroeconomic space. The woes originated from a plate full of macroeconomic crises such as increased external financing constraints and high funding requirements. These included the $2 billion Eurobond maturity in 2024, rising financing costs, and weakening international reserves.

Kenya’s credit rating has deteriorated on the three major rating agencies’ indices: Moody’s, Fitch, and Standard & Poor (S&P). The recent outlooks published indicated that Kenya had a B3 rating on Moody’s with a negative outlook. Fitch’s credit rating was last reported at B and a negative outlook similar to S&P B-rating and negative outlook.

The credit rating is aimed at gauging the country’s ability to cut the mustard and ability to meet debt obligations and is one of the core determinants used to assess debt instruments, such as Eurobonds.

Kenya’s Eurobond Yields Surge as Moody’s Reports Negative Outlook.

The Inside Scoop:

The revision of Kenya’s credit rating was hinged on many factors, such as an increase in the sovereign debt service, which may rise to $4.3 billion in 2024, including the $2 billion Eurobond repayment in 2024. Also, the fall in the international reserves to $7 billion from $8 billion in 2022, the increment in the government debt/GDP ratio to 71.0% from 67.3% in 2022, and inflation contributed to the adverse credit risk outlook.

The yields on the return of the Eurobonds have spiked and there is a huge possibility of a distressed exchange when there are economic losses to creditors. Moody’s already estimated that Kenya will have substantial debt servicing obligations after redeeming its 2024 Eurobonds. 

Connecting the Dots:

The Eurobonds yield has soared since the negative outlook by the credit rating agencies. To lessen the impact of this situation, the Kenyan President, William Ruto, spilled a yarn that it will buy back half of the $2 billion in 2024 Eurobonds before the 2023 year-end.

The bond buyback is intended to allow the government to manage Kenyan’s Eurobonds in a way that will save its citizens money and serve the Kenyans’ best interest. This development will however enhance the country’s debt management at the expense of its investors. 

The Bottom Line:

There are increasing fears among investors because there is a high chance that the bonds ($2 billion) will be redeemed at a price below their face value, which will constitute an economic loss to investors. The citizens feared that the blow would affect the East African country in assessing debt instruments such as Eurobonds, which have become a major source of financing deficits and development in Africa. Kenya’s negative rating, however, signifies higher risk and higher borrowing costs from the capital market.

In addition, investors’ panic worsened because Kenya might be forced to restructure its debt like Zambia and Ghana, but Rogovic claimed the country has sufficient financing options to repay its 2024 Eurobonds.

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