Parastatal debts weigh on sovereign credit rating

International ratings agency Moody’s has warned the Treasury to keep an eye on State corporations’ debt to preserve Kenya’s credit grade. FILE 

By John Gachiri

In Summary

• Moody’s said there was a risk of Kenya’s credit rating deteriorating as long as the government gives implicit guarantees on debt taken by financially weak State corporations.
• To reduce such levels of debt by parastatals the Treasury has prescribed privatisation and getting on board strategic investors, but analysts said that while these help some times it is governance structures that need mending.

International ratings agency Moody’s has warned the Treasury to keep an eye on State corporations’ debt to preserve Kenya’s credit grade.

In a presentation made in Nairobi on Wednesday, Moody’s said there was a risk of Kenya’s credit rating deteriorating as long as the government gives implicit guarantees on debt taken by financially weak State corporations.

Moody’s said that its assessment of credit risk takes into account the financial health of state-owned enterprises.

“Even though state-owned enterprises’ debt is off the government’s balance sheet, it still represents a potential contingent liability. Strong governance and performance evaluation of State-owned enterprises are often measures adopted to reduce potential risks to sovereign credit quality,” said a Moody’s presentation on infrastructure financing.

The estimates on revenue and expenditure for the financial year ended June 30 2012, show that total borrowings, government and international grants for all State corporations stood at Sh206 billion or a third of the Sh636 billion that the parastatals generated in revenues.

The figures are based on forecasts for the financial year 2011 to 2012. Estimates for the 2012/2013 financial year show that the costs are expected to increase to Sh328.3 billion. Financially weak State corporations have been a burden on the Treasury.

Nzoia, Miwani, Muhoroni, Chemelil and South Nyanza sugar companies, for example, owe the government Sh41.8 billion, Sh33 billion of which the Treasury plans to write-off.

The debt is nearly half the Sh86 billion or $1 billion the government wants to raise at the end of the year through the issue of a sovereign bond on the international markets meant to finance the national deficit and fund infrastructure.

READ: Treasury sets Sh85bn target for international bond

A lower rating would be factored on the pricing of Kenya’s debut bond on the international market. To reduce such levels of debt by parastatals the Treasury has prescribed privatisation and getting on board strategic investors, but analysts said that while these help some times it is governance structures that need mending.

READ: Treasury to stop financing indebted state corporations

“Sometimes it is a management problem where performance is dependent on who is appointed to the board,” said Johnson Nderi, head of research at Suntra Investment Bank.

Moody’s presentation titled Closing the Infrastructure Gap: Challenges & Prospects for Sub-Saharan Africa Sovereigns however says that there is need for the central government to back debt by parastatals.