Ruto Kenya: Pushes New African Risk Assessment Methodology, Shares Data

• President William Ruto has offered Kenya as a test case for a new African risk assessment methodology, proposing to share national default and recovery data with rating agencies.
• Ruto argues that current financial rules divert African pension savings from infrastructure to government securities, despite regulatory allowances for project investment.
• Kenyan pension funds hold 46% of their $24.7 billion in government securities but only 0.02% in infrastructure debt, despite a 10% allowance.
• Kenya commits to making its regulators available for collaboration and expects methodology changes if evidence from African markets does not support current assessments.
• Ruto emphasized Africa's growing domestic capital pools, exceeding $2 trillion, and the declining reliance on external financing for infrastructure development.

President William Ruto has positioned Kenya as a pivotal test case for a revised African risk assessment methodology, advocating for a data-driven approach to global financial evaluations.

President William Ruto has positioned Kenya as a pivotal test case for a revised African risk assessment methodology, advocating for a data-driven approach to global financial evaluations. Speaking at the Africa We Build High-Level Roundtable on regulation, risk, and reward in New York on Monday, September 21, President Ruto announced Kenya's readiness to share its comprehensive default and recovery data with international rating agencies. This initiative, convened by the Africa Finance Corporation (AFC) on the sidelines of the 81st session of the United Nations General Assembly, underscores a commitment to accepting changes to the existing methodology, provided they are substantiated by empirical evidence.

President Ruto highlighted a critical issue: current financial regulations disproportionately channel African pension savings into government securities, even when existing rules permit greater investment in vital infrastructure projects. He asserted that Africa's challenge is no longer a scarcity of capital, but rather the restrictive framework of rules dictating capital allocation. This stance echoes an argument he previously made at the inaugural Africa We Build Summit in Nairobi in April, emphasizing the need for African nations to leverage their own domestic capital for infrastructure development.

The current investment landscape in Kenya starkly illustrates this regulatory dilemma. Kenyan pension funds, managing a substantial Sh3.2 trillion ($24.7 billion), allocate a significant 46 percent of these assets to government securities. In stark contrast, their investment in infrastructure debt stands at a mere 0.02 percent, despite regulations allowing for up to 10 percent allocation to such projects. President Ruto used the evocative phrase, "he who pays the piper calls the tune," to illustrate this point, referencing an Eldoret teacher whose pension contributions are more likely to fund a US Treasury bill than a local geothermal plant.

He clarified that this outcome is not due to a lack of patriotism from fund managers, but rather a rational response to existing incentives. The prevailing rules deem a Treasury bill a prudent investment, while a power plant is considered adventurous, thereby directing capital away from crucial development projects. This perspective aligns with observations from Samaila Zubairu, President and Chief Executive of the Africa Finance Corporation, who at the Nairobi summit, characterized Africa as "not capital-poor; it is capital-trapped," emphasizing the systemic issues preventing capital from flowing to productive sectors.

President Ruto's core objective is to ensure that African risk is evaluated based on actual evidence from African markets, rather than on assumptions that inflate the perceived cost of financing projects and nations. To facilitate this, Kenya has committed to making its pension and insurance regulators available for collaboration with rating agencies, insurers, and standard setters. The President affirmed that if the evidence validates the current methodology, Kenya will publicly accept the findings; however, if it does not, a change in methodology will be expected.

To advance this critical work, President Ruto proposed the establishment of a dedicated working group, to be based in Nairobi. This group is tasked with continuing the research and presenting its data-backed findings at the next Africa We Build Summit within 12 months. He also outlined four key requests to financial institutions involved in financing: to price African risk against African experience, ensure affordable insurance for productive assets, eliminate penalties on long-term assets within prudential and liquidity rules, and actively build bankable project pipelines.

The broader context for this initiative is Africa's growing financial independence. President Ruto highlighted that African non-bank domestic capital pools have now surpassed $2 trillion. This figure significantly overshadows the $1.7 trillion in external concessional and commercial flows directed to Africa between 2014 and 2024. Furthermore, official development assistance has seen a consistent decline every year since 2020, reinforcing the argument that Africa can no longer depend on external financing to meet its substantial infrastructure needs.

In line with this vision, Kenya has already begun implementing mechanisms to mobilize domestic capital. The National Infrastructure Fund, which was signed into law in March, represents a significant step towards channeling local resources into critical development projects. This fund aims to mobilize substantial capital, underscoring Kenya's proactive approach to financing its own growth and setting a precedent for other African nations seeking to redefine their financial autonomy through a revised Ruto Kenya African risk assessment methodology.

Lawyers advising Kenyan pension funds, financial institutions, or infrastructure project developers should closely monitor the proposed review of risk assessment methodologies and investment rules. These changes could significantly impact regulatory compliance, investment strategies, and the viability of infrastructure financing in Kenya and across Africa.

Source: Original reporting via The Standard