Kenya deserves an investment grade rating

African countries were rated in order to access the euro bond market, a natural next step for those, including Kenya, Zambia, Ghana, Côte d’Ivoire, and Senegal, that were graduating to middle income status. In addition to concessional funding, they could now tap into global financial markets.

There is increased questioning of the fairness, accuracy and subjectivity of these ratings, and their effects on the cost of capital.

This prompted the African Union to task the African Peer Review Mechanism with establishing an African Credit Rating Agency, as a private sector led initiative that could provide deeply informed, and fair ratings of the African economies.

Meanwhile, member states have been licensing Credit Rating Agencies (CRAs). Kenya leads the pack in East Africa with five. Tanzania and Uganda have licensed one apiece. The EAC has adopted a directive to harmonise the regulatory regimes.

The meeting in Mombasa follows a similar one in Abidjan in June. Further, the private sector, in partnership with the APRM, held a conference in Cape Town in May, building on previous efforts in Nairobi in November 2024.

Laying out the case for improved rating of Kenya, the CS presented comparative data from Mauritius, Botswana and Morocco. It is noteworthy that Kenya is performing as well or better with these comparators.

For example, while Botswana is a $ 20 billion per year economy, Mauritius is $16 billion, while Morocco is $154 billion. Botswana’s debt-to-GDP ratio is at 28 percent, while Mauritius, Morocco and Kenya are at 87, 70 and 65.5 percent, respectively.

Read: Why sovereign credit rating matters

Other key macro variables follow a similar pattern. Botswana was growing at one percent in 2024, compared to 4.7 percent, 3.3 percent and 4.7 percent for Mauritius, Morocco and Kenya respectively. Inflation was 2.8 percent in Botswana in 2024. Mauritius was slightly higher at 3.6 percent while it was one percent in Morocco and 4.5 percent in Kenya.

Fiscal deficits were 6.7 percent, 5.8 percent, 4.1 percent and 5.2 percent of GDP for Botswana, Mauritius, Morocco and Kenya respectively in 2024. Kenya, it would appear, deserves a better rating. However, beyond the quantitative data lies some qualitative (hence subjective) interpretations.

For example, when the finance bill 2024 collapsed, one rating agency quickly down-graded Kenya, expecting a wider fiscal deficit. Yet they should have observed the objective response of government – reducing expenditure through a supplementary budget! To overcome such reputational risks, government must intensively engage the CRAs.

And countries do have uniqueness.

Take payment systems. Most western analysts observe Kenya’s mobile money platforms in a mixture of awe and confusion. How is it possible to move more than three times the GDP in small amounts per year? Is it formal or informal? Their questions are endless.

But some of the questions should also make us pause and ponder. One, put to me in polite tones has significant implications. Should the National Treasury consider revising the price stability target?

Section 4 (4) & (5) of the Central Bank of Kenya Act gives the Cabinet secretary for the National Treasury the power to set the price stability (inflation) target of the government at least once every 12 months.

The target informs CBK’s conduct of Monetary Policy - the actions to maintain low and stable inflation rate over time. Inflation is the general increase in prices over time.

Increases are caused by many factors both local and international, from weather to the price of oil. Higher oil prices increase energy and transport costs.

A weaker shilling, while promoting exports, causes inflation through imports. Money supply also comes to the reckoning. High inflation inhibits growth, and makes the shilling lose value. But deflation can also inhibit economic growth, as it reduces profits, lowering the incentives for investing.

CBK delivers the target by varying interest rates.

The latter have huge impacts on the debt service amount, a key consideration in the credit ratings. The import of the question is this. Having succeeded in bringing and keeping inflation down (the annual average was 3.65 percent in September), why is the inflation target still a high 5 percent+- 2.5, which effectively means 7.5 percent!

Ndiritu Muriithi is an economist and partner at Ecocapp Capital.  He is also the chairman of KRA and former governor of Laikipia County. Email: [email protected]