Moody’s Ratings, in a report released on Monday, September 15, 2025, has revealed that governments and businesses in Nigeria, South Africa, and Kenya are grappling with soaring debt burden.
In the detailed report, Moody’s raised an alarm about what it described as the vulnerabilities in the economic markets of Nigeria, South Africa, and Kenya.
According to the report, this soaring debt burden could hinder long-term growth prospects across the African continent.
The report also highlighted that borrowing costs have surged over the past five years for both sovereign entities and the private sector in these nations.
Factors such as structural policy weaknesses and subdued economic growth have exacerbated the issue, making it increasingly difficult for these countries to access affordable financing.
“Sub-Saharan African economies have substantial funding needs for development. However, limited equity capital and high debt costs remain key barriers despite access to funding broadening over time. Three of the largest markets – South Africa (Ba2 stable), Kenya (Caa1 positive), and Nigeria (B3 stable) – face a combination of structural weaknesses that keep borrowing costs high and will take time to address.
“More effective policy frameworks would support lower debt financing costs. Borrowing costs are high across the board, although debt costs in South Africa are lower than in the other two markets.
“Debt costs for banks, nonfinancial companies, and sovereigns have increased in all three markets alongside higher policy rates during the past five years, but banks have withstood the increase by actively repricing assets.
“While concessional lending from development partners helps lower foreign currency debt costs, it has not fully offset high local and foreign market interest rates,” the report said in part.
The report said that despite advanced financial markets, South Africa has higher borrowing costs than its emerging market peers.
“South Africa’s borrowing costs are lower than those in frontier markets like Kenya and Nigeria. All sectors benefit from deep financial markets and effective monetary policies, but costs are still higher than in many major emerging markets because of economic and fiscal constraints.”
It noted that without improvements, South Africa risks continuing a negative spiral in which high interest rates aimed at attracting inflows amid subdued growth limit domestic investment and further hinder economic prospects.
According to the report, Kenya’s sometimes uncertain policies and shallow markets keep debt costs high despite moderate inflation.
“Limited savings and a large informal economy constrain market depth. Corporate access to market debt is highly restricted, exacerbated by high sovereign funding needs, which crowd out the private sector.
“Banks are key for credit allocation, but sometimes face policy uncertainty. While the government has taken steps to improve market function and financial inclusion, these challenges take time to address. Building policy continuity and strong relationships with development partners will aid progress.”
In Nigeria, the ratings firm added that high inflation and limited savings are the reasons for the soaring debt burden.
“The sovereign and banks have mitigated high market borrowing costs through lower-cost funding sources, but companies are less able to do the same,” the report noted, adding that, however, Nigeria’s financial markets are better at channelling funds to companies than Kenya, partly because competing demand from the sovereign’s funding needs is lower.
“Recent reforms aim to establish robust financial markets, especially for foreign exchange, and strengthen monetary policy transmission channels, but are starting from a low base. Future efforts to deepen financial markets, boost confidence, and tackle corruption may help gradually lower borrowing costs.
“Sub-Saharan African economies face major development funding needs, hindered by limited equity and high debt costs, despite gradually improved access to external and domestic funding. In the three largest Sub-Saharan African markets by number of private-sector debt issuers we rate — South Africa, Kenya, and Nigeria — structural weaknesses persist, keeping debt costs high and requiring time to resolve.”
Looking at borrowing costs on international markets for the three sovereigns, Moody’s said that credit spreads over US Treasurys have eased since 2022 for lower-rated Kenya and Nigeria but remain around 500 basis points.
“Local currency borrowing costs have also fallen but remain high, especially in Nigeria and Kenya, driven by domestic policy rates and structurally low savings as well as weak policy credibility and monetary transmission.
“A borrower’s cost of debt mostly reflects a country’s interest rate environment, but also the mix of funding sources it can rely on. Some aspects of a borrower’s funding mix can help limit costs. For instance, low per-capita-income countries like Kenya and Nigeria can access funding from official lenders on more concessional terms, helping lower the average cost of debt.
“However, these funding flows tend to be small, in part because lending conditions are stringent.
“The interest rates that banks and nonfinancial companies pay are highly influenced by a country’s policy rates and sovereign borrowing costs, though market-specificities can loosen the link.
“In all three countries, banks mostly rely on deposit funding, with a component of savings and term deposits, which makes their cost of funding sensitive to policy-rate movements.
“Companies typically borrow at local policy rates plus a margin which depends on their credit quality.”
When interest rates rise, sovereigns and companies are more exposed, with higher borrowing costs ultimately resulting in lower or slower investments and reduced growth and development. While banks are sensitive to a country’s interest rate because their profitability largely relies on the differential between the average interest rate earned on its assets and that paid on its liabilities, the degree of this sensitivity depends on the mix of assets and liabilities.
“The sensitivity of banks’ funding bases in South Africa, Nigeria, and Kenya to policy rates is broadly compensated or outweighed by the interest they earn on their assets, with some delay in asset repricing in Kenya.
“Despite advanced financial markets, South Africa has higher debt costs than emerging market peers. South Africa’s borrowing costs are lower than frontier markets like Kenya and Nigeria thanks to its deep financial markets and sound economic policies, including monetary policy transmission channels.”
