Fitch affirms Kenya's borrowing power to near default

It maintained it at 'B' with a negative outlook

In Summary
  • It has noted the government’s stronger commitment to narrowing the budget deficit.
  • Fitch expects the Central Bank of Kenya to be cautious on rate cuts, especially while pressure on the currency persists.
National Treasury building
TREASURY: National Treasury building
Image: FILE

Fitch Ratings has Kenya’s credit ratings at ‘B’ with an outlook accorded as negative, reflecting the sovereign’s large funding needs, external finance risks, high domestic financing costs and challenges to fiscal consolidation.

In its latest update, the global rating form however noted the government’s stronger commitment to narrowing the budget deficit.

Fitch says Kenya’s rating is supported by the authorities’ fiscal consolidation plans and monetary policy tightening anchored by an IMF program, recent recovery in the macroeconomic environment, and strong medium-term growth prospects.

However, the sovereign rating is constrained by weak governance, high-interest payments, a narrow revenue base and high external indebtedness.

Kenya’s sovereign external financing requirement has increased sharply in the current fiscal year ending June 2024 to about $5.5 billion, up from $2.6 billion in 2023, mainly due to higher principal repayment including the $2 billion for the inaugural Eurrobond bond taken in 2014. 

Eurobond repayment is due in June 2024. A weaker exchange rate also adds to Kenya’s debt servicing challenges, as half of its government debt is foreign-currency denominated.

The rating agency says the government’s external debt service will moderate in 2025, but remain significant at just over $3 billion and is projected to remain above $3 billion in 2026-27.

“We assume that the government will meet its financing obligations in FY24 through a combination of official lending and commercial borrowing”.

Kenya has secured about $0.8 billion (Sh105.6 billion) from the IMF and $0.4 billion (Sh52.8 billion) in syndicated loans and expects to receive over $1 billion from the World Bank in April and a further $1.1 billion from the IMF before the end of 2024.

It is also in talks with other external partners including China.

The government has issued a $1.5 billion Eurobond to buy back the majority of its upcoming Eurobond maturity.

Fitch does not consider this to constitute a distressed debt exchange.

Kenya is targeting nearly $4 billion in external borrowing in FY25, of which nearly $2 billion would be from official creditors.

Fitch forecasts the current account deficit/GDP ratio to widen to 4.3 per cent in 2024 and remain unchanged in 2025, reflecting higher import needs and a relatively narrow export base.

The trend of current account deficits largely financed by borrowing has led to a build-up in net external debt, which we forecast above 60% of GDP in 2024-2025, more than double the ‘B’ median.

The combination of the current account deficit, higher external debt obligations and external financing constraints have resulted in currency depreciation and downward pressure on reserves.

External official and commercial disbursements should moderate pressure on reserves over the short term.

Analysts project gross reserves will rise above $8 billion by end-2024, providing coverage of just over our ‘B’ median of 3.7 months of current external payments.

External funding constraints have increased the government’s reliance on domestic financing, putting upward pressure on interest costs.

Average yields on short-term government securities have repriced upwards, reflecting the increase in central bank policy rates, stronger demand for shorter-term government securities, and domestic liquidity constraints.

“We project the government interest payments/ revenue ratio to reach 30.2 per cent in 2024 and 31.2 per cent in FY25, well above 2025 ‘B’ median forecast of 13.7 per cent”.

Kenya’s central bank has raised the policy rate twice by a total of 250bp to 13 per cent since November 2023 to curb inflation and support the currency.

Although external funding constraints will moderate and real rates will remain in positive territory, Fitch expects the Central Bank of Kenya to be cautious on rate cuts, especially while pressure on the currency persists.

The government’s budget deficit narrowed to 5.6 per cent of GDP in 2023, from 6.2 per cent of GDP in 2022. The government plans to continue on its fiscal consolidation path in FY24.

Fitch forecasts the FY24 budget deficit at 5.2 per cent of GDP amid still high spending pressure and legal challenges to revenue reform efforts.

Revenue collection in 1HFY24 was short of the target on a pro-rata basis. Fitch forecasts the deficit to narrow to 4.4 per cent of GDP in FY25 as revenue reforms gain momentum through a combination of tax reforms and non-tax measures, while spending will edge down marginally as a percentage of GDP.

A record of underperformance in revenue collection and high spending pressures has increased government debt in recent years.

Fitch estimates that government debt/GDP rose to 71.8 per cent in FY23 from 67.6 per cent in FY22, above the ‘B’ median of 60.3 per cent.

As at end-FY23, nearly half of public debt was foreign-currency denominated, exposing it to currency risk.

The rating firm expects government debt to rise in FY24 to 73.8 per cent of GDP, partly linked to currency depreciation, but to decline slightly in FY25 as revenue reforms materialise and GDP growth remains strong.

The rating agency is worried by the country's high pending bills which have accumulated in recent years, highlighting shortfalls in public financial management.

Outstanding public sector arrears amounted to Sh568 billion (4.0% of GDP) in FY23, falling slightly to Sh539 billion (3.3% of GDP) at end-2023. However, pending bills of county governments rose 7.7% to Sh164.8 billion (1.2% of GDP) in FY23.

The government has established a pending bills committee mandated to verify and clear existing arrears, but Fitch expects pending bills to remain high in the near term. 

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