A downgrade of Kenya’s credit rating by a second ratings agency could trigger a bigger market selloff by investors, analysts warned, pointing to an upcoming verdict by Fitch this weekend, only weeks after another agency, Moody’s slashed its view of the country’s sovereign debt.
Global investors have seen heightened risks in Kenya since late June when President William Ruto responded to anti-government protests by rejecting proposed tax increases that would have added Sh346 billion in additional government revenue.
Moody’s was swift to act, cutting its opinion on Kenya’s sovereign debt deeper into “junk” territory amid concerns over the fiscal backdrop.
Fitch is set to publish its own decision on Kenya at midnight on August 3, with the third of the major rating agencies, S&P, due to issue an opinion on August 23.
Investment experts warn that another downgrade could come, risking a bond selloff by foreign investors that may also slam stocks and the shilling.
“You could definitely see another rating downgrade if pressures persist on the fiscal side and if social conditions continue to worsen,” Kevin Daly, investment director for emerging markets at Abrdn, told the Business Daily in an interview.
Abrdn is a British firm with more than $650 billion in assets under management, including a Kenyan sovereign debt portfolio.
“Another downgrade is important because funds have ratings mandates,” Mr Daly added.
Asset managers allocate funds for clients under mandates that guide the quality of investments. For debt investors, this often means that bonds must be rated at a certain level by a certain number of the three major rating agencies. Commonly, funds require at least two of the three agencies to deem issuers as having adequate credit.
“The Moody’s downgrade didn’t have much of an effect, because you need to get more than one rating agency giving a similar rating,” said Kenneth Minjire, a senior associate for debt and equity at broker AIB-AXYS Africa, noting that there was still some pressure on Kenya’s Eurobonds and its local-currency infrastructure bonds.
While Moody’s downgrade rattled investors, it is unlikely to have triggered selling as a result of investment mandates. But if Fitch follows Moody’s with a downgrade, then Kenyan sovereign debt would be downgraded by two of the three key ratings agencies, which could force funds to sell down Kenyan portfolios as a result.
“A downgrade from Fitch is a big deal, definitely bigger than Moody’s,” says Mr Minjire. “I expect a much bigger selloff.”
Fitch last evaluated Kenya’s credit position in February, when it affirmed the country’s credit rating at “B” with a negative outlook, noting large funding needs and ongoing risks to accessing financing.
In terms of ratings, high-quality or investment-grade debt is typically classed in the “A” range, with more speculative credit rated around B and riskier bonds at a higher risk of default considered junk approaching a “C” rating or lower.
“We’re just two weeks away from an infrastructure bond auction, and a lot of it is targeting offshore investors to bring in foreign currency flows to stabilise the shilling,” says Mr Minjire. “It is a big deal.”
If Fitch downgrades Kenya’s credit rating, it could also accelerate the flight of foreign capital and support the argument that risks are rising for overseas investors.
“Kenya will be classified as a lot more risky. It will affect our local bond market, it will affect our equity market, and it will affect our equities allocations in the indices,” says Mr. Minjire. He adds that a downgrade could heap pressure on the shilling as well, not just because investors could sell the currency as a speculative bet, but because pessimism from Fitch could limit demand for Kenya’s local bonds.
