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Kenya’s credit risks worsen on corona shocks – Moody’s

In Summary
  • In each of the next three years, Kenya will need to repay on average 1.8 per cent of GDP in principal on external debt.
  • In May, the rating firm downgraded Kenya’s creditworthiness to negative from stable.
Graph showing Kenya's debt.
Graph showing Kenya's debt.

Kenya’s credit score of B2 negative is likely to drop further on the economic effects of coronavirus, which eroded the government’s revenue base, weakening fiscal metrics.

Global credit rating firm Moody’s in its latest report on Kenya says the country is faced with high liquidity risks, increasing its vulnerability to debt defaults.

''An increase in Kenya's already sizeable borrowing requirements to finance wider deficits will amplify its liquidity risks given the structure of government debt,’’ Moody’s said.

In May, the rating firm downgraded Kenya’s creditworthiness to negative from stable.

It attributed the negative score to the country’s rising financing risks posed by large gross borrowing requirements, which include amortization of external bilateral debt and the need to refinance a large stock of short-term domestic debt.

According to the rating agency, although a relatively strong agricultural sector and robust remittances are supporting growth, border closures and lockdown measures have weighed on a number of key sectors.

Remittances, which are a key source of income and support consumption, have held up well year to date, growing four per cent year-over-year through July.

The Central Bank of Kenya recently revised its forecast for full-year remittances upwards to growth of one per cent from a 12.3 per cent annual decline previously.

''The relative strength of remittance inflows will provide important support for the economy, as well as a source of foreign exchange that will prevent a widening of the current-account deficit,’’ the report indicates.

Even so, the government's initial response to the crisis – which included border and school closures, the suspension of public gatherings and a nightly curfew – significantly curtailed domestic mobility and weighed on most sectors of Kenya’s economy in the first half of the year.

Moreover, lingering job and income losses will keep GDP growth subdued at around one this year.

''We expect a rebound next year in concert with a recovery globally, but a resurgence of coronavirus cases and a spike in unemployment that increases social tensions present material risks,’’ the report says.

Moody’s expects Covid-19 to continue weakening Kenya’s fiscal balance in the current financial year as weaker revenue collection and fiscal measures in response to the pandemic delay fiscal consolidation.

It however expects the government to embark on a gradual path of fiscal consolidation as the crisis eases, but a weak track record of fiscal policy effectiveness points to risks of a slower pace of fiscal consolidation.

Efforts to scale down government operations and activities in the second half of the fiscal year helped contain recurrent spending with the development budget also sliced by 12 per cent.

The New York-based firm expects Kenya's gross borrowing to remain high, reflecting the large fiscal deficit and the structure of government debt, which increases liquidity risk.

It says that although the government’s borrowing plans for the fiscal year indicate a preference for domestic debt, it is entering a more difficult amortization period on its external debt, which will force it to borrow externally to repay.

In each of the next three years, Kenya will need to repay on average 1.8 per cent of GDP in principal on external debt.

Of this amount, about one per cent of GDP per year is due to bilateral creditors,

Including the Export-Import Bank of China, China Development Bank, and Eastern and Southern African Trade and Development Bank (TDB)

''Unless offset by new external borrowing, these maturing loans will need to be financed through higher domestic issuance, drawing down on international reserves,’’ says Moody’s.