The cost of financing for any borrower – be it an individual, company, county or country – is determined by the borrower’s credit risk, whether the risk is real or perceived. Determining credit risk with precision can be difficult, even for the most sophisticated lender because of a lack of full information on the borrower. Still, policymakers prefer that lenders make an effort. The Central Bank of Kenya (CBK) for instance, now insists that all banks submit their risk-based pricing formula for approval.
Credit Reference Bureaus (CRB) and Credit Rating Agencies (CRA) are private companies licensed by central banks and capital markets authorities, to assist lenders to determine credit risk. In a few countries, the central banks operate the reference bureaus themselves. The methodologies that the bureaus and agencies use should be data-driven and less subjective. But just how well the rating agencies are performing their role is the subject of a raging controversy.
A couple of weeks back, the African Union (AU) criticized Moody’s, the credit rating agency, for claiming that Kenya’s planned euro bond buyback could be interpreted as a default event. Moody’s comments were premature and misplaced for two reasons. First, the details of the planned US$1 billion buy-back were not public yet, so how could they judge? And second, buy backs are not unusual. They allow the issuers to pay the bondholders early in return for a discount on the par value of the bond. Instead of you waiting until next year for me to pay the 100 shillings I owe, can I pay you 99 shillings right now? You get your money early and I save a shilling.
The effect of Moody’s default comments was a bond sell-off, which caused prices to tumble. The rating agency was itself reacting to investor questions on a June announcement by the President Ruto that Kenya would buy back half the US$ 2 billion euro-bonds before December this year, instead of waiting to make a bullet payment on the June 2024 maturity date. The buy-back plan was no doubt intended to overcome the persistent market murmurs about Kenya’s ability to meet the obligations come next year.
Both the AU and the Kenyan authorities reacted sharply to Moody’s statement, with Ruto calling the rating agency a tool of colonialists. This is the latest spat in the continuing bad blood between three Western-based credit rating agencies and African governments. The three agencies – Moody’s, Fitch and Standard & Poor (S&P) – are accused of unfair ratings which make it difficult for African countries to access fairly priced credit in global financial markets.
In a damning report released in April this year, the United Nations Development Program (UNDP) points out that unfair ratings are costing the 33 rated African countries US$74.5 billion per year in higher interest and opportunity costs.
You can understand why governments are up in arms. Is it not odd that with all the talk of Africa rising, only two countries – Mauritius and Botswana – are listed as investment grade. To give you context, both economies are smaller than the combined economy of the ten countries forming the Central Economic Region (CEREB).
And it does not stop there.
Individual company ratings are tied to sovereign ratings. So, when Fitch downgraded Kenya’s long-term default rating to B from B+ last December 2022, they also revised downwards the ratings of the leading commercial banks and bank groups, including NCBA, KCB and Stanbic.
The impact was to drive up the cost of capital of those corporates, not because they are now suddenly riskier or not profitable – banks are generally enjoying boom times – but because they operate in Kenya. Fitch explained that it had revised downwards its view of the Sovereign’s ability to come to the rescue of the banks should it ever be necessary! And that further, the bank groups held significant government securities. Never mind the securities are highly profitable for the banks.
All three rating agencies view Kenya’s investment position as highly speculative – that is, below investment grade. This view means that all companies operating in Kenya, including such money-minting behemoths like Safaricom are seen as below investment grade!
Such odd interpretations are causing disquiet among African countries. In response AU has called for an African credit ratings agency, or in the alternative, steps to promote African-based rating agencies. The latter, being market-based, is seen as a superior solution.
African governments must share some of the blame for the current unsatisfactory situation, however. There has been a very low uptake of ratings. In the home markets of the three agencies now criticized, regulators rely on ratings to approve listings and bond issues, providing companies with a streamlined, efficient route to capital raising. Not so on our continent.
In addition, there is reluctance by the governments themselves to use African-based credit rating agencies, even for domestic borrowing. The Kenyan National Treasury, for example, is unsure whether to rely on ratings by Kenyan-based rating agencies, even though the agencies are licensed by its own regulator, the Capital Markets Authority (CMA).
Some of the agencies such as Metropol Credit Rating Agency are licensed by several countries across the region. If African governments are not relying on homegrown solutions, how can they expect others to do so?
And there is a strong case to rely on agencies with deep country or regional operations. Such agencies are likely to have deeper industry and sector analysis of the economies which they are rating since preparing such analysis is their bread and butter. This should result in better, well-reasoned ratings.
But it seems nobody is immune to the pain of a poor rating. The US Treasury Secretary Janet Yellen complained bitterly on August 1st after Fitch’s downgraded the US rating from AAA to AA+. “I strongly disagree with Fitch Ratings’ decision” Yellen said, as she criticized the downgrade as arbitrary and based on outdated data.
@NdirituMuriithi is an economist