Kenya’s debt burden to rise due to deficits and borrowing costs – Moody’s

Moody’s Investors Service has placed the B1 long-term issuer rating of the government of Kenya on review for downgrade due to persistent primary deficits, high borrowing costs continue to drive government indebtedness higher.

It said its review will focus on assessing:

1) The country’s medium-term fiscal trends, and the likely policy response to ongoing budgetary pressures

2) The effectiveness of the government’s medium-term financing plan in managing liquidity risks

3) The government’s overall credit profile relative to similar-rated peers

The firm also placed Kenya’s rating on review also due to government liquidity pressures risk rising in the face of increasingly large financing needs.

“Moody’s expects that Kenya’s government debt burden, which has risen to 56.4 percent of GDP in June 2017, up from 40.5 percent five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3 percent of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60 percent mark by June 2018.”

“Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0 percent of its revenues on interest payments, up from 10.7 percent five years ago.”

Moodys say it will change the downgrade if, “The review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.”

On the other hand, S&P Global Ratings affirmed its ‘B+/B’ long-and short-term foreign and local currency sovereign credit ratings and stable outlook.

The ratings are supported by the country’s monetary flexibility, liquid domestic capital markets and diversified economic base.

On the flipside, historical ethnic tension, low GDP per capita levels, high government fiscal deficits and debt and weak external position are constraints to a higher rating.

The stable outlook hinges on the expectation of strong growth prospects will facilitate fiscal consolidation and curb increases in external debt over 2018.