DEBT RATING

Kenya's external loan profile downgrade in new Fitch rating

The country's rising debt that is currently at Sh6.3 trillion has been under sharp focus, with both local and international experts doubting the country's ability to service it.

In Summary
  • It lowered Kenya's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable
  • Kenya is planning to borrow a total Sh840.6 billion: Sh494 billion of the loan locally and Sh347 billion from the external debt market
Treasury
Treasury
Image: MONICAH MWANGI

Kenya's loan exposure risk has been further revised, which could hurt plans to  borrow at least Sh347 billion from the international market to plunge its budget deficit. 

Credit rating firm Fitch has lowered Kenya's Long-Term Foreign-Currency Issuer Default Rating (IDR) to negative from stable and affirmed the IDR at 'B+'. It has also downgraded the country’s ceiling to 'B+' from 'BB-'.

This is likely to affect Kenya's attractiveness in the debt market, forcing lenders to either shy away from loaning the country or lend at higher rates to cover default risk. 

 
 

In a detailed report, Fitch attributed the negative revision to coronavirus shock, which it said will drive a sharp economic slowdown and deterioration in the budget deficit and government debt, against a background of a weak track record of fiscal consolidation.

''Kenya's public finances were already a rating weakness. We believe the coronavirus shock will delay any significant narrowing of the fiscal deficit until at least the fiscal year ending June 2022,'' the rating agency said.

Kenya is planning to borrow a total Sh840.6 billion: Sh494 billion of the loan locally and Sh347 billion from the external debt market to fill a deficit in its Sh2.79 trillion expenditure budget for the 2020/21  financial year. 

General government debt is forecast to reach nearly 70 per cent of GDP in FY21, just above 2021 'B' median and well above the end-FY21 level of 39 per cent.

However, it expects the debt to GDP  to begin levelling off in FY22, but the government's uneven track record in implementing fiscal policy brings significant risk.

''Highlighting the issue of rising debt and weak revenue growth, we forecast Kenya's government debt to revenue ratio will reach 350 per cent in FY20, well above the 'B' median of 259 per cent,'' Fitch said.

Kenya's rising debt that is currently at Sh6.3 trillion has been under sharp focus, with both local and international experts doubting the country's ability to service it. 

 
 

Last month, Moody's Investors Service changed the outlook on Kenya's ratings to negative from stable.

It attributed the negative outlook to the rising financing risks posed by the country's large gross borrowing requirements at a time when the fiscal outlook is deteriorating due to the erosion of the revenue base and a debt structure that exposes Kenya's fiscal metrics to exchange rate and interest rate shocks.

It named amortisation of external bilateral debt and the need to refinance a large stock of short-term domestic debt as some of the pending risks. 

The International Monetary Fund (IMF) had earlier that month raised Kenya’s risk of debt distress to high from moderate due to the Covid-19 pandemic. 

The Bretton Woods institution said that the Covid-19 crisis had sharply cut Kenya’s export and economic growth.

Fitch forecasts Kenya's GDP growth to slow to one per cent in 2020, as the slowdown in global trade and services impact Kenya's export and tourism sectors.

‘’We expect more than a 30 per cent fall in Kenya's agribusiness exports, including horticulture, tea, and coffee, which accounted for approximately three per cent of GDP in 2019,’’ Fitch said.

It also expects a 20-40 per cent fall in travel receipts and remittances, which had risen to comprise a total of 4.3 per cent of GDP in 2019.

''The lockdown measures will drive a sharp contraction in the growth of Kenya's domestic services sectors,'' Fitch said.

The rating agency forecasts a widening of the general government deficit to 8.6 per cent of GDP in FY20, reflecting an additional hit to revenue from the coronavirus shock itself, tax relief measures adopted by the government that cost an estimated 0.5 per cent of GDP in foregone revenue.