Fitch Downgrades Kenya to ‘B’ with Stable Outlook
Fitch Ratings has downgraded Kenya’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with outlook accorded as stable. The downgrade reflects Kenya’s persistent twin fiscal and external deficits, relatively high debt, deteriorating external liquidity, and high external financing costs, which presently constrain access to international capital markets, Fitch said.
According to the rating note, the government faces elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion Eurobond in June 2024, which combined with high current account deficits, will lead to sustained pressure on international reserves.
Meanwhile, Fitch explains that the stable outlook accorded to Kenya reflects some progress with fiscal consolidation, which is supported by a $2.3 billion IMF programme, manageable near-term debt commitments and strong post-pandemic growth that is likely to continue over the medium term.
It said the successive shocks of the coronavirus pandemic and the Russia-Ukraine war have contributed to a widening current account deficit and lower international reserves.
Fitch forecasts the current account deficit to grow to 5.9% of GDP ($6.9 billion) in 2022 and to remain at broadly the same levels in 2023 and 2024. As a result, the international reserves position has fallen to $7.2 billion as of November 2022, down from $9.5 billion at the end of 2021.
Despite IMF and other official disbursements, the ratings forecast reserves to remain under pressure reaching $7.4 billion at end-2023, saying this would constitute a fall to three months of current external payments (CXP) at end-2023, down from 4.8 months of CXP at the end-2021.
“Exchange rate flexibility has helped absorb some of the external pressure, but foreign-currency liquidity has tightened as a result and currency depreciation has increased Kenya’s external interest servicing in shilling terms”.
Fitch forecasts external debt service to rise to 24.8% of current external receipts in 2024, up from 16.6% in 2023, owing to the June 2024 $2 billion Eurobond payment.
“Currently, our base case assumes that the government will meet its external debt obligations of $3 billion in the fiscal year ending June 2023 (FY23) through a combination of official and commercial borrowing”.
This includes approximately $900 million in IMF disbursements, a $750 million World Bank budget support loan, and $300 million from the Eastern and Southern African Trade and Development Bank.
The Kenyan government also plans an additional $600 million in syndicated loans from commercial banks. “We also expect that the government will be able to meet its 2024 external debt obligations through disbursements from the IMF and other multilateral lenders and through additional commercial borrowing”.
With gradual fiscal consolidation, Kenyan’s strong revenue performance helped the fiscal deficit narrow to 6.2% of GDP in 2022, down from 8.2% in 2021.
The improvement came from a combination of strong revenue performance after several years of declining revenue and a fall in capital expenditure, according to Fitch.
It added that the government has ended the subsidy on petrol and is working on a supplementary budget that cuts an additional 0.7% of GDP in expenditure. However, a constrained financing environment has meant that approximately 0.7% of GDP in spending obligations from 2022 have been carried over to the present fiscal year, which will limit additional deficit reduction.
“We forecast a fiscal deficit of 6.1% of GDP in 2023, above the forecast 3.5% ‘B’ median”. Meanwhile, Kenya’s general government debt fell to 67.4% of GDP in 2022 from 67.7% in 2021.
Strong growth and continued fiscal improvement are likely to see government debt continue to fall but remain above 60% of GDP, and the projected 2024 55% of GDP ‘B’ median, over the medium term.
Moreover, at 385% of GDP in 2022, Kenya’s debt-to-revenue ratio is well above the current ‘B’ median of 282%. Increased reliance on domestic debt to finance the fiscal deficit will put upward pressure on interest costs, especially as the Central Bank of Kenya has raised interest rates in response to inflation pressures.
“We forecast interest payments to increase to 29.5% of revenue in 2023, which is close to three times the ‘B’ median forecast of 10.8%”. Fitch expects Kenya’s growth to remain steady in 2023 and 2024 following strong post-pandemic growth recovery.
Growth has been mixed this year, with drought lowering output in the agricultural sector during the early part of it and the August 2022 general election contributing to an expected slowdown in 3Q-2022.
“We forecast real GDP growth of 5.4% in 2022, down from 7.5% in 2021. Fiscal tightening, high inflation, and slower global growth will present headwinds in 2023; although improving asset quality may support growth through higher private sector credit growth”.
Over the medium term, Fitch Ratings forecasts average growth of between 5% and 6%. The combination of rising food prices, partly due to drought, and the global supply shock have resulted in significant inflationary pressures in Kenya.
Consumer inflation reached a five-year high of 9.6% in October 2022; although monthly inflation slowed in November.
Analysts expect inflation to begin falling but to still average 8.3% in 2023, just below the forecast ‘B’ median of 8.5% but above Kenya’s five-year average to 2021 of 5.9%.
Easing inflationary pressures would allow the Central Bank of Kenya (CBK) to end its monetary tightening cycle, which would take pressure off government borrowing costs and contribute to private sector credit growth. The CBK raised the main policy rate three times in 2022, by a total of 175bp, most recently in November. # Fitch Downgrades Kenya to ‘B’ with Stable Outlook