- On Friday, the shilling hit a new low of 152.08 units against the greenback
- This is after Kenya revised its currency from Sh120.80 to Sh155.81 against the US dollar.
If the exchange rate depreciates significantly from current levels, it could add to Kenya’s debt servicing challenges, particularly in the near term, Fitch Rating has said.
The Hong Kong-based credit rating agency in the latest note on Kenya expressed concerns about the weakening shilling, saying it has dropped faster than its forecast of 148 units against the dollar by the end of the year.
On Friday, the shilling hit a new low of 152.08 units against the greenback, moving closer to the government's projection of 155 by the time of repaying part of the $2 billion inaugural Eurobond taken in 2014.
"The shilling traded around Sh/$150 at the end of October 2023, compared with our expectation in July that it would reach about Sh/$148 by the end of FY24,'' Fitch said
It further indicates that the country's external financing requirement is set to rise in FY24, partly reflecting a higher principal repayment burden, now expected at about 3.5 per cent of GDP against three per cent of GDP in the original budget, mainly driven by currency depreciation.
Speaking on Thursday during the State of the Nation address in Nairobi, President William Ruto said the government has committed to pay $300 million (Sh45.6 billion) in December as the initial installment for the debt due June next year.
“The debt has since become of much concern to the citizens, markets and our partners,” Ruto said.
The country's shilling has depreciated by an average of 20 per cent in the past 12 months against major international currencies.
This has forced the government to revise its repayment plan upwards.
For instance, the inaugural Eurobond of $2 billion taken in 2014 will now attract an extra Sh70 billion due to the weak shilling.
The dollar was selling at an average of Sh88 by the time Kenya was raising its first-ever Eurobond debt.
Data from the National Treasury shows the country will pay Sh311.6 billion to clear the initial Eurobond in June, up from the initial Sh240 billion.
This is after Kenya revised its currency from Sh120.80 to Sh155.81 against the US dollar.
The government is leaning toward multilateral institutions following tightness in the global markets, which has rendered the issuance of fresh debt to refinance maturing debt an improbable route to settle the maturity, which is eight months away.
Fitch further says that Kenya's latest budget estimates remain broadly in line with Fitch Ratings’ projections from July 2023, when the agency affirmed the sovereign’s rating at ‘B’ and revised the Outlook to Negative.
However, there remains a significant risk of further fiscal slippage, particularly if the exchange rate weakens further.
"In July we said that a rapid increase in government debt/GDP, due to failure to narrow the budget deficit, sustained depreciation pressures, or increased risks to debt sustainability due to rising debt interest costs, could put downward pressure on Kenya’s rating,'' the rating firm says.
The government’s recent draft supplementary budget estimates highlight the risk of fiscal slippage, with the new deficit forecast for the fiscal year ending in June 2024(FY24) being roughly 1pp greater than the original budget forecast of 4.4 per cent of GDP.
"However, it remains broadly in line with the 5.5 per cent deficit we assumed in our July assessment''.
According to the report, the wider-than-budgeted deficit for FY24 has been driven largely by increased debt service, which the government now expects to reach about 5.7 per cent of GDP, compared with the original budget’s projection of 4.8 per cent.
This has been partially offset by a reduction in capital investment under the development budget.
Domestic accounts payable reached about four per cent of GDP for the national government and 1.2 per cent of GDP for county governments as of end-FY23, up by about 12 per cent and eight per cent, respectively, from end-FY22, though some of these payables may be disputed.
"When we affirmed Kenya’s rating at ‘B’ in July, we assumed that the government would be able to meet its financing obligations in FY24 through a combination of official lending, syndicated loans and a drawdown in official reserves,'' Fitch said.
It said that Kenya still has sufficient reserves to meet its external debt obligations falling due in the near term, with useable foreign-exchange reserves at $6.8 billion as of 2 November, around 3.7 months of import cover.
It however warns that deploying reserves to redeem the Eurobond would reduce import cover, which could still contribute to a downgrade of Kenya’s rating depending on the extent of the drawdown and the outlook for other sources of external financing.