Fitch Says Twin Deficits Remain Key Kenya Sovereign Sensitivities

Fitch Ratings says Kenya’s ‘B+’/Negative sovereign rating is constrained by low GDP per capita and the sizeable twin deficits.

“The willingness and ability of the Kenyan authorities to address persistent fiscal and external deficits remain key components of our sovereign credit analysis as President Kenyatta begins his second term, Fitch Ratings says. The drawn-out election process, its disputed outcome and the impact on the economy increase fiscal risks,” the Analysts note.

The government’s consolidation plans are partly based on raising revenue above 20% of GDP, from 18%-19% in the past. We believe that this unlikely in the current fiscal year (ending June 2018) or in FY19, and we have revised our fiscal deficit forecast for FY18 to 7.7% of GDP from 6.4%. This is still narrower than the government’s reported FY17 deficit (8.9%), but represents significantly less consolidation than the budget envisages.

Fitch’s base case is for GDP growth to recover to 5.5 percent  in 2018 as falling inflation allows the Central Bank of Kenya to begin easing monetary policy and the infrastructure buildout continues. However, election-related disruption may have a longer-lasting impact on the economy, creating downside risks to our projections. Kenya’s Purchasing Managers Index (PMI) has risen from a record low of 34.4 in October, but remains in contractionary territory.

Failure to implement fiscal consolidation and stabilise government debt/GDP, or a widening of the current account deficit that led to significant reserves drawdown, could be negative for the rating.

Source: