Governments, banks and businesses in Nigeria, South Africa and Kenya are facing significantly elevated borrowing costs driven by structural weaknesses, unfavourable market conditions and inflation, according to a report published by Moody’s Ratings.
The cost of debt for both sovereigns and private sector actors has risen sharply over the past five years, threatening growth and increasing fiscal pressure across the three largest economies in Sub-Saharan Africa.
In its latest study, Moody’s highlights that Nigeria, Kenya, and South Africa continue to face some of the highest borrowing costs among emerging markets, despite growing funding needs to support economic development and social investment.
Nigeria, rated B3 with a stable outlook, is grappling with the combined effects of double-digit inflation, currency pressures and low domestic savings, all of which keep both local and external debt expensive.
Kenya, rated Caa1 positive, remains constrained by shallow capital markets, high sovereign financing requirements that crowd out private borrowers, and persistent policy uncertainty.
South Africa rated Ba2 stable, benefits from deeper financial markets and stronger institutions but still contends with structurally higher interest rates than its peers, driven by fiscal deficits, weak growth, and subdued investor confidence.
Moody’s warns that these elevated borrowing costs not only strain government budgets by diverting resources from infrastructure and social programmes to debt servicing, but also discourage private sector investment, hampering the long-term growth prospects of Sub-Saharan Africa’s three largest economies.
Moody’s outlines distinct challenges across the three economies that continue to drive up borrowing costs and limit growth potential. In Kenya, persistent policy uncertainty, shallow capital markets and a high reliance on short-term debt instruments have left both the government and the private sector struggling to secure affordable credit.
The country’s large informal economy and low domestic savings rates further reduce market depth, while heavy sovereign borrowing often crowds out private firms, limiting access to finance for small and medium-sized enterprises that are vital for job creation.
Nigeria, meanwhile, faces the dual burden of stubbornly high inflation and weak savings, factors that keep the cost of both domestic and foreign borrowing elevated.
Although recent reforms aimed at stabilising the foreign exchange market and improving monetary policy transmission signal progress, Moody’s notes that they are being implemented from a fragile starting point, and structural weaknesses continue to weigh on investor confidence.
South Africa, despite having the region’s most sophisticated financial markets, is not insulated from high debt costs, which remain entrenched due to sluggish economic growth, fiscal deficits and policy uncertainty around energy and structural reforms.
The report cautions that the country risks entering a negative feedback loop in which elevated interest rates, while necessary to attract foreign inflows, simultaneously suppress domestic investment, creating a cycle that could further slow growth and exacerbate fiscal vulnerabilities.
The rise in borrowing costs has far-reaching implications for both governments and businesses across Nigeria, Kenya and South Africa. For public finances, higher interest rates mean a growing share of national budgets is being channelled toward debt servicing rather than critical investments in infrastructure, healthcare, education and other development priorities, constraining long-term growth.
The private sector is equally affected, as elevated lending rates increase the cost of capital, discourage new ventures and weaken the appetite for business expansion, particularly among small and medium-sized enterprises that are the backbone of job creation.
While banks in all three countries have largely succeeded in passing on these higher costs through asset repricing, the process is uneven; in Kenya, for instance, repricing often lags, creating a temporary squeeze on profitability and further tightening credit conditions in an already strained market.
Moody’s notes that easing the burden of high borrowing costs will require a combination of structural reforms and stronger policy execution. Strengthening policy frameworks to improve credibility and consistency, particularly in monetary management and fiscal discipline would help anchor investor confidence and reduce risk premiums.
Expanding and deepening domestic capital markets is also seen as critical, as broader access to debt and equity financing would provide governments and businesses with more affordable funding options.
At the same time, boosting domestic savings through greater financial inclusion, robust regulatory oversight and more stable macroeconomic conditions could expand the pool of investable funds and reduce reliance on costly external borrowing.
Concessional funding and favourable lending terms from multilateral lenders and development partners continue to provide some relief, but Moody’s warns that these flows have only partially offset high market rates and cannot substitute for the structural reforms needed to lower borrowing costs on a sustainable basis.
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