Credit Rating in Africa

Ordinarily, it would not be necessary for a government or any other borrower to repeatedly announce that they have enough resources to repay their creditors. They would just pay.  The Kenya government officials have, over the last six months made numerous public statements indicating that government has money to repay the euro bond which is maturing next June, that they intend to repay earlier and so on. 

No doubt the officials are trying to manage the persistent negative market sentiment.  Investors and citizens alike are worried that Kenya could default.  But the public statements only serve to highlight the worries about the repayment.

Coming soon after the revelation by the International Monetary Fund (IMF) that Kenyan authorities had approached them for support in the euro bond repayment and that a December mission would review the matter only adds fuel to the raging fire of doubt. 

All the anxiety is because nobody wants to see the Kenyan economy unravel. Rather, even the sharpest critics wish the regime would talk less, make fewer unnecessary promises, and manage the economy better, so that the welfare of Kenyans improves. And for the record, blaming Uhuru, the Israel-Palestinian conflict or war in Ukraine, does not constitute managing the economy.

And neither is complaining about poor credit rating. Many countries including the US complain when their credit rating drops. They do so because it means higher costs of debt.  Everyone would like to have a high credit rating and to enjoy the lowest possible cost of credit.

Credit rating criteria is not a secret.  Rating agencies make determination on the basis of data that governments themselves publish.  The better the quality of the data, the better the rating.  Agencies examine government finances, policies and stated intentions.  They analyze the realism of revenue expectations. For instance, how realistic is this year’s Ksh.3 trillion tax revenue expectation by the Kenyan authorities? Tax collection will grow from last year’s Ksh.2.2 trillion.  But can it increase by more than one third in just one year?  Unlikely. And with budgeted expenditure rising, it can only mean a bigger deficit and more borrowing.

For three years in a row, Kenyan authorities have reported in key public finance documents such as the budget policy statements, that the republic is in high risk of debt distress. This, according to their joint assessment with the IMF. It should be no surprise then, when credit rating agencies adopt the same view!

Sophisticated borrowers approach credit rating proactively, not complaining when rating agencies have pronounced themselves.  They seek help.  There is an emerging practice of credit rating advisors. One regional entity used this approach to achieve an investment grade rating, availing itself better pricing on its bond.

Problems are opportunities by another name.  Various entities have responded to the persistent cries about sovereign credit ratings.  The African Union established a fulltime unit within the Africa Peer Review Mechanism (APRM) to keep track of sovereign ratings. Producing a report twice a year, they have strongly suggested that African countries improve their credit rating regulations. 

And many countries like Kenya, Nigeria and Rwanda already license credit rating agencies, with Kenya having four.  But perhaps in demonstration of low self-confidence if there was ever such, the rating regulations did not envisage Kenyan licensed agencies conducting a sovereign credit rating.  By its own regulation, Kenya has put itself at the mercy of very foreign licensed agencies it is complaining about!

Kenyan Treasury officials have often asked me if local credit rating agencies can issue a sovereign rating, suggesting we are yet to overcome a big psychological hurdle. The western based credit rating agencies are themselves local in their home markets. Helpfully, the Capital Markets (Credit Rating) regulations are under review. Once published, version 2.0 will cure this anomaly.

Implementing an AU Summit decision, the APRM has just closed a bid inviting investors to become shareholders of the proposed Africa Credit Rating Agency.  There is divided opinion on this initiative, with some arguing that the market will be reluctant to trust a government owned credit rating agency. These anxieties could be overcome with a majority private sector shareholding of the proposed agency.

Further afield, the UNDP published a damning report earlier this year, showing that Africa countries are out of pocket some US$74 billion annually in higher interest expenses and lost opportunity costs.  This, the result of understated credit ratings.  In their view, western based rating agencies, with scant presence on the continent, do not know Africa, and their methodology is inappropriate. 

It is a good thing that UNDP is seeking improve the current situation. It bears some responsibility having introduced African governments to sovereign ratings. Under the Africa Credit Rating Initiative, it paid western agencies to rate African countries. This enabled the countries to tap into the Eurobond market for additional development resources.

African based credit rating agencies themselves are stepping up the conversation. To be held later this month, the Africa Credit Rating Summit will be the fourth such gathering in as many months. Hosted by Metropol Credit Rating Agency, a Kenyan based pan-African agency, and follows similar events by Nigeria’s DataPro, the APRM’s release of sovereign ratings mid-year report.

Credit rating is not just for countries. It is even more useful for companies. Capital Markets Authorities use ratings to hasten approval of the issuance of securities. In the Kenyan market, insurance brokers regularly ask for an insurance company’s rating before placing their business. Banks use credit ratings to make loan appraisal more cost effective, and to price risk as required by the Central Bank.  Private equity and venture capital players use credit ratings in their investment decision making.

Credit rating affords investors some measure of protection. By law and in practice a credit rating is reviewed periodically, typically a minimum of once a year, but often more frequently to take into account changing economic conditions and new data. It is that regular review that should give an investor a measure of comfort.