COUNTRY OUTLOOK

Fitch reaffirms Kenya's borrowing power at B+

The negative outlook on Kenya's ratings reflects the underlying weaknesses of the public finances and the uncertain pace of planned fiscal consolidation

In Summary
  • The country's 'B+' rating reflects a track record of strong growth and relative macroeconomic stability and a favourable government debt structure.
  • The Fitch Rating head of the Middle East and Africa sovereign ratings in February had told Reuters that his agency is likely to downgrade any country that took up G20 debt relief offer.
Graph showing Kenya's surging debt.
DEBT: Graph showing Kenya's surging debt.
Image: COURTESY

Fitch Ratings has affirmed Kenya's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a negative outlook.

The country's 'B+' rating reflects a track record of strong growth and relative macroeconomic stability and a favourable government debt structure.

These positive factors are balanced against rising public debt levels, high net external indebtedness, and GDP per capita and governance indicators that are below the 'B' range medians.

The Fitch Rating head of the Middle East and Africa sovereign ratings, Jan Friederich in February had told Reuters that his agency is likely to downgrade any country that took up G20 debt relief offer. 

However now according to Fitch, Kenya's DSSI participation will not impact capital-market access negatively

“Kenya is eligible to apply for debt restructuring under the G20 Common Framework, but we do not expect Kenya to request such treatment in the near term, "said the rating firm.

The negative outlook on Kenya's ratings reflects the underlying weaknesses of the public finances and the uncertain pace of planned fiscal consolidation.

The rating firm said Kenya had for several year passed budgets that contained medium-term plans to narrow fiscal deficit, but which still left deficits substantially worse than rated peers'.

The Covid-19 shock has further delayed potential consolidation and we forecast the general government fiscal deficit to reach 9 per cent of GDP in the fiscal year ending June 2021 (FY21), above the 'B' median of 7.1 per cen,"ti said.

The government's medium-term fiscal framework, presented in the 2021 Budget Policy Statement (BPS), envisages bringing the fiscal deficit to 7.5 per cent of GDP in FY22 and to below 5 per cent in FY24.

“We forecast only a slightly larger FY22 deficit of 7.7 per cent, but believe subsequent narrowing of the deficit will be slower than what is contained in the BPS,” Fitch said.

The firm expects capital expenditure to continue falling as large infrastructure projects like the Standard Gauge Railway come to an end.

However, current expenditure will remain high as the government pursues its post Covid-19 recovery programme and  focuses on targeted social spending.

Revenue/GDP is expected to remain flat through the 2022 financial year as the BPS contains a number of tax administration adjustments meant to increase collection and expand the tax base, but no new revenue measures.

The Kenyan government has reached staff-level agreement with the IMF on a 38-month $2.4 billion support programme.

Fitch believes that the support will provide a firmer anchor for Kenya's fiscal consolidation efforts but notes that Kenya did not complete the second review under the previous IMF programme agreed in 2015.

Fitch forecasts general government debt to reach 68.8 per cent of GDP in the 2021 financial year and plateau at approximately 71 per cent over the medium term.

It says the FY21 debt forecast is in line with 'B' rated peers', but Kenya's debt/revenue, at 382 per cent, is higher than the 'B' median of 218 per cent.

Despite rising debt levels, Kenya has a favourable debt structure, with foreign-currency debt composing approximately half of government debt versus the current 'B' median of 63 per cent, and fairly flexible fiscal financing options.

In the absence of Eurobond issuance in 2020, the government was able to increase its domestic debt issuance in FY21, while interest rates remained stable.

Fitch estimates that Kenya faces $2.6 billion (2.6 per cent of GDP) in sovereign external debt servicing in FY21 and $3.6 billion (3.3 per cent) in FY22.

This, the government will meet with a combination of IMF financing, a $1billion World Bank Development Policy Operation, and planned Eurobond issuance in FY21 and FY22.