Borrowing Costs Soar Across Nigeria, Kenya and South Africa as Moody’s Warns of Growth Constraints

Businesses and governments in Nigeria, Kenya, and South Africa are confronting dramatically higher borrowing costs compared to previous years, according to a comprehensive new analysis by Moody’s Ratings released this week. The credit agency’s report underscores a critical challenge facing three of Africa’s largest economies as they struggle to balance development needs with escalating financing expenses that threaten to constrain economic growth prospects.

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The Moody’s assessment reveals that high interest rates, policy weaknesses, and challenging market conditions have made loans and credit substantially more expensive across these major African economies. This development occurs against a backdrop of urgent funding requirements to sustain development and growth trajectories, creating a complex policy environment for governments and businesses alike.

“Borrowing costs are high across the board,” stated Moody’s Senior Vice President Lucie Villa, emphasizing the comprehensive nature of the financing challenge. “Debt costs for banks, non-financial companies and governments have increased in all three markets alongside higher policy rates during the past five years.”

Central Bank Policy Rates Reflect Anti-Inflation Stance

The elevated borrowing costs reflect aggressive monetary policy responses to persistent inflationary pressures across the region. Nigeria currently maintains the highest benchmark interest rate among the three economies, with the Central Bank of Nigeria holding its Monetary Policy Rate at 27.50% following its 300th Monetary Policy Committee meeting in May 2025.

This rate represents the outcome of six consecutive interest rate hikes in 2024, totaling 875 basis points, as the CBN attempted to combat inflation that reached over 24% earlier in the year. The Nigerian central bank has maintained this elevated rate for three consecutive meetings in 2025, indicating sustained concern about price stability despite some moderation in inflation to 22.22% in June.

Kenya’s central bank has set its benchmark rate at 9.50%, while South Africa maintains a 7% interest rate, both significantly elevated compared to historical norms. These rates reflect the monetary authorities’ commitment to containing inflation while supporting currency stability, though they contribute substantially to the elevated borrowing costs facing businesses and governments.

The policy rate differentials illustrate varying degrees of macroeconomic pressure across the three economies, with Nigeria facing the most severe inflation and currency stability challenges, requiring the most aggressive monetary policy response.

Structural Weaknesses Perpetuate High Financing Costs

Moody’s analysis identifies fundamental structural issues that extend beyond cyclical monetary policy tightening. The three largest Sub-Saharan African markets by number of private-sector debt issuers face credit ratings of B3 stable for Nigeria, Caa1 positive for Kenya, and Ba2 stable for South Africa, reflecting varying degrees of credit risk that influence borrowing costs.

These structural weaknesses include shallow domestic capital markets, limited institutional investor bases, and constrained fiscal positions that affect government and corporate access to affordable financing. The challenges are compounded by low domestic savings rates, particularly in Nigeria and Kenya, which restrict the availability of local currency funding sources.

In Kenya, Moody’s specifically blamed government overborrowing and shallow local markets for restricting business access to credit. The report noted that excessive government borrowing has crowded out private sector access to domestic financing, while underdeveloped capital markets limit alternative funding sources for businesses.

Nigeria faces the additional challenge of high inflation and structurally low savings rates, which limit the availability of low-cost credit for companies. The country’s inflation volatility and currency pressures have particularly affected the local bond market’s ability to provide long-term financing at reasonable rates.

International Market Access Remains Constrained

While borrowing costs on international markets have moderated slightly since 2022 for Nigeria and Kenya, they remain elevated at approximately 500 basis points above U.S. Treasuries. This spread reflects persistent investor concerns about credit risk, political stability, and macroeconomic management in these economies.

The elevated international borrowing costs limit governments’ ability to access affordable foreign currency funding for infrastructure and development projects. Several countries in the region experienced a two-year hiatus from international bond markets before recent renewed access, indicating the persistent challenges in maintaining investor confidence.

Development finance institutions and concessional lending from multilateral partners have provided some relief by offering below-market rates for specific projects and programs. However, these funding sources have not been sufficient to offset the overall high interest rate environment affecting local and international commercial markets.

South Africa’s Relative Advantage and Constraints

South Africa benefits from more developed domestic capital markets and a stronger monetary policy framework compared to Nigeria and Kenya, helping maintain relatively lower borrowing costs. The country’s more sophisticated financial infrastructure provides greater access to diverse funding sources, including a deeper corporate bond market and more developed pension fund sector.

However, Moody’s warned that South Africa’s borrowing costs remain elevated compared to many emerging market peers due to persistent fiscal constraints and slower economic growth prospects. The country’s debt-to-GDP ratio and fiscal deficit concerns continue to influence investor perceptions and financing costs.

“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,” the Moody’s report cautioned, highlighting the self-reinforcing nature of the financing constraints.

Economic Growth Implications and Regional Context

The elevated borrowing costs occur within a challenging regional economic environment. According to the IMF’s April 2025 Regional Economic Outlook, Sub-Saharan Africa’s growth is projected at 3.8% in 2024, with expectations of reaching 4.0% in 2025, though this recovery remains fragile and uneven across countries.

The African Development Bank’s 2025 African Economic Outlook projects Africa’s economy to grow from 3.3% in 2024 to 3.9% in 2025, but notes that interest payments now consume 27.5% of government revenue across Africa, up significantly from 19% in 2019.

Nigeria’s economy is forecast to grow at 3.0% in 2025, while South Africa faces more constrained prospects at just 1.0% growth, both significantly below the regional average. Kenya’s growth outlook remains more positive, though still affected by fiscal consolidation requirements and elevated financing costs.

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Banking Sector Resilience and Asset Repricing

Despite the challenging interest rate environment, banking sectors in all three countries have demonstrated resilience through active asset repricing. Moody’s noted that banks have successfully managed the transition by repricing their loan portfolios to reflect higher policy rates, though with some delays in asset repricing in Kenya.

The sensitivity of banks’ funding bases to policy rates has been broadly compensated by higher interest earnings on assets, though this dynamic has contributed to elevated lending rates for businesses and consumers. Banks have maintained profitability through wider interest margins, but this has come at the cost of reduced credit accessibility for borrowers.

Banking sector stability has been supported by regulatory supervision and capital adequacy requirements, though the high interest rate environment continues to test asset quality and borrower capacity across the region.

Fiscal Policy Challenges and Debt Sustainability

Governments across the three economies face mounting pressure to address fiscal imbalances while managing high debt service costs. Fifteen African countries are currently experiencing double-digit inflation, limiting monetary policy flexibility and maintaining pressure on interest rates.

Debt sustainability concerns have intensified as governments allocate increasing portions of revenue to interest payments. The elevated borrowing costs make fiscal consolidation more challenging by increasing the cost of refinancing existing debt and limiting access to new financing for development spending.

International support through debt relief initiatives and concessional financing programs provides some assistance, but the scale of funding needs requires sustained improvements in domestic resource mobilization and more efficient public spending allocation.

Business Investment and Private Sector Impact

The high borrowing cost environment significantly affects private sector investment decisions and business expansion plans. Companies face elevated costs for working capital financing, equipment purchases, and expansion projects, limiting their ability to invest in productivity improvements and job creation.

Small and medium enterprises are particularly affected by restricted credit access and high borrowing costs, as they typically lack access to alternative funding sources available to larger corporations. This dynamic potentially constrains broader economic growth by limiting the development of the entrepreneurial sector.

Corporate bond markets remain underdeveloped in Nigeria and Kenya, forcing businesses to rely primarily on bank financing or foreign currency borrowing, both of which carry elevated costs in the current environment.

Policy Reform Requirements and Outlook

Addressing the high borrowing cost challenge requires comprehensive structural reforms across multiple dimensions. Moody’s emphasized that fixing these issues “will take time and will require stronger policies and more effective financial systems to reduce borrowing costs across the region.”

Key reform priorities include developing deeper domestic capital markets, improving monetary policy transmission mechanisms, strengthening fiscal institutions, and enhancing governance frameworks to build investor confidence. Countries also need to address structural savings constraints and develop alternative financing mechanisms for development needs.

Monetary policy normalization will likely require sustained progress on inflation control and currency stability, allowing central banks to gradually reduce policy rates. However, this process must be carefully managed to avoid undermining hard-won price stability gains.

International Cooperation and Support Mechanisms

The elevated borrowing costs highlight the importance of international cooperation in supporting African economic development. Development finance institutions play a crucial role in providing concessional financing and technical assistance to help countries build more robust financial systems.

Multilateral development banks and bilateral donors can support reforms through policy-based lending, capacity building programs, and risk-sharing mechanisms that help crowd in private sector investment. Regional financial integration through initiatives like the African Continental Free Trade Agreement may also help develop broader capital markets.

Future Prospects and Strategic Implications

The trajectory of borrowing costs across Nigeria, Kenya, and South Africa will significantly influence their economic development prospects over the coming years. Success in addressing structural weaknesses and implementing necessary reforms could help restore access to affordable financing and support sustained economic growth.

Failure to address these challenges risks perpetuating a cycle of high borrowing costs, constrained investment, and slower growth that undermines long-term development objectives. The interconnected nature of fiscal, monetary, and financial sector challenges requires coordinated policy responses and sustained political commitment to reform implementation.

As global economic conditions continue evolving, these three economies’ ability to manage borrowing costs while maintaining macroeconomic stability will be crucial for their competitiveness and development prospects within the broader African and global economic landscape.

The Moody’s analysis serves as a critical reminder that addressing high borrowing costs requires more than cyclical monetary policy adjustments—it demands fundamental structural reforms to build more resilient and efficient financial systems that can better support sustainable economic growth and development across the region.

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By: Montel Kamau

Serrari Financial Analyst

16th September, 2025