Fitch Affirms Kenya at ‘B-‘ with Stable Outlook
Fitch Ratings has affirmed Kenya’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook. Kenya’s ‘B-‘rating reflects strong medium-term growth prospects, a diversified economy and recent strengthening of the monetary policy framework.
The rating is constrained by weak governance, high debt servicing costs, a significant level of informality constraining government revenues and high external indebtedness underpinned by challenges to fiscal consolidation, despite increased efforts to narrow the budget deficit.
Fitch said the stable outlook reflects expectation that continued strong official creditor support will help alleviate near-term external liquidity pressures, although the sovereign’s funding needs will remain large and are expected to rise.
These pressures have eased following the February 2024 Eurobond issuance and buyback of USD1.44 billion of a USD2 billion Eurobond that was set to mature on 24 June 2024 in February.
Additionally, strong official disbursements and remittances have contributed to recent currency appreciation (22% against the US dollar in 2024), moderating the external debt servicing burden, as about 55% of the government’s debt is foreign-currency denominated.
Socio-political tensions have eased following the government’s withdrawal of the Finance Bill 2024, which had proposed tax hikes that sparked violent social protests in June-July 2024.
President William Ruto has since formed a broad-based government and improved public engagement to enhance understanding of the importance of the fiscal consolidation strategy.
However, Fitch analysts view the risk of renewed social unrest as high over the short term due to persistent socio-economic challenges, complicating fiscal consolidation efforts and posing risks to economic activity.
“We forecast gross external financing needs will decline to 6.3% of GDP in 2025, from 7.5% of GDP in 2024, due to projected lower fiscal deficit and debt amortisation and improved external liquidity”, Fitch said.
Government external debt service (including amortisation and interest) is expected to moderate in the fiscal year ending June 2025 to USD4.1 billion , from USD5.4 billion in 2024, but will exceed USD5 billion in FY26 through to FY29, sustaining large financing needs.
Fitch anticipates further slippage, with the budget deficit reaching 4.8% of GDP in FY25, 1.5pp higher than the government’s initial budget target and 0.4pp above its revised target.
Notwithstanding efforts to cut spending, analysts expect expenditure to remain high, driven by higher debt servicing, increased social spending amid civil pressures, and new spending pressures from collective bargaining agreements.
The government plans to reduce expenditure by 0.6% of GDP to offset some of its withdrawn revenue-raising measures (estimated at nearly 2% of GDP). Fitch assumes that the deficit will be financed through a mix of domestic and foreign borrowing, with nearly 60% sourced domestically, sustaining high interest costs, and shortening maturities.
The government plans to secure about USD5 billion (nearly 4% of GDP) through official and commercial borrowing in FY25, with half of this sourced from multilateral creditors, including the final USD0.9 billion disbursement from the IMF programme ending in April 2025.
It also plans to issue a sustainability-linked bond, although details are unclear. The expiration of the IMF arrangement introduces uncertainty over subsequent financing flows. Fitch anticipates that negotiations will lead to a new funding arrangement, but the timeline is uncertain.
The government proposes that additional tax measures will contribute about 0.3%-0.4% of GDP to revenue in FY25. However, Fitch analysts maintain a conservative revenue outlook due to expectation of revenue shortfalls consistent with Kenya’s record of underperformance and gaps in public financial management.
Underperformance in revenue continued in 1HFY25, which analysts estimate at 6.4% below target on a pro rata basis.
The government also continues to accumulate pending bills, with the stock of domestic arrears rising to KES528.4 billion (3% of GDP) at end-September 2024, from KES516.3 billion at end-June. Fitch projects that the revenue/GDP ratio will rise in FY25-FY26, averaging 17.7%, which is below the government’s initial target of 18.4%.
Revenue shortfalls have led to greater recourse to more expensive borrowing from external commercial creditors and the domestic market.
The Central Bank of Kenya’s (CBK) easing policy stance since August 2024 has helped lower average domestic yields in recent months. Nonetheless, they remain elevated, reflecting ongoing revenue constraints. Analysts project government interest payments/revenue to exceed 32% in 2025 (from 31% in 2024), more than double the ‘B’ median forecast of 15%, and to remain high in FY26 at a similar level (‘B’ median 14.6%).
“We estimate that central government debt/GDP declined to 67% in FY24, mainly linked to a stronger shilling in 2HFY24. We expect the ratio to decline marginally to 66% by FYE26, due partly to stronger nominal GDP growth, but remain above the ‘B’ median of 50.5%”.
Fitch projects the current account deficit (CAD) to widen slightly in 2025 to 4.1% of GDP from 3.9% of GDP in 2024, due to higher imports and a narrow export base.
The trend of CADs largely financed by official borrowing has led to a buildup in net external debt, which analysts forecast above 50% of GDP in 2025-2026, nearly double the ‘B’ median.
The combination of the CAD and high external debt obligations will pressure reserves, although cushioned by strong official disbursements. We project reserves at USD8.9 billion by end-2025 (from USD9.2 billion at end-2024), providing 3.6 months of current external payments, below its ‘B’ median of 4.2 months.
“We project real GDP growth of 5.1% in 2025, up from 4.6% in 2024, driven by a rebound in private sector activity, even as the government undertakes spending cuts”.
Inflation fell to 4.5% in 2024, within the CBK’s target range of 2.5%-7.5%, from 7.7% in 2023, due to lower food and energy prices and a stronger shilling, prompting three rate cuts to 11.25% since August.
“We expect inflation to remain around the mid-point of the CBK’s target range, potentially allowing for further rate cuts, although the CBK may take cautious moves to support the currency”. #Fitch Affirms Kenya at ‘B-‘ with Stable Outlook Honda, Nissan to Announce Merger Details in Mid-February -Officials
