Standards and Poor’s has rated Kenya’s fiscal and debt burden as weak, exposing the country’s poor credit profile to external lenders.
Although the global rating agency affirmed Kenya’s long and short-term currency sovereign credit ratings at B+/B’, indicating a stable outlook, it gave the country’s debt burden a score of five on a scale of one (strongest) to six (weakest).
Kenya’s bad debt position could scare away international lenders, with those ready to take the risk opting to charge higher interests.
S&P Global Ratings analysis of sovereign creditworthiness is based on its assessment and scoring on institutional assessment, economic, external, fiscal flexibility, monetary assessment and debt burden.
"We estimate that Kenya’s stock of general government debt will remain high at close to 50 per cent of GDP over 2018-2021, while interest payments will remain above 15 per cent of revenues over same period.Large fiscal and debt burdens are rating weaknesses, and fiscal consolidation is key to stabilising debt metrics," S&P said.
In the current financial year, Kenya is expected to spend Sh870 billion in debt repayment. This is 50 per cent its projected domestic revenue collection of 1.6 trillion.
However, according to the rating agency, a change in score does not in all cases lead to a change in rating because in determining the final rating, the committee can make the use of flexibility afforded by rating methodology.
In S&P ratings, AAA rating is given to an economy that has no default risk while those at highest risk of default are given D rating. Kenya’s B+ stable rating is highly speculative.
Kenya’s stable outlook was supported by its track record of reasonably strong headline and per capita GDP growth, and its increasingly diversified economic base relative to peers in the region.
S&P praised Kenya’s forex balancing and ability to bounce back after protracted election cycle last year, predicting that economic growth prospects will remain reasonably strong, despite significant fiscal and external deficits.
"The CBK operates a floating exchange rate system with interventions to smooth volatility. In 2018, the Kenyan shilling has been largely experiencing nominal appreciation against major currencies. Economy has recovered and 5.5 growth from 4.9 per cent is realistic," S&P said.
However it threatened to lower the ratings if the country’s external position weakens more than expected due to higher current account deficits, and consequently a faster increase in external debt, or due to a decline in Kenya’s external buffers in the absence of an International Monetary Fund (IMF) programme that expired mid this month.