Higher Debt Costs Threaten Kenya’s Credit Profile –Rating Note
The burden of higher debt costs to service Kenya’s total public debt has been noted to be negative to the nation’s credit profile amidst government efforts to drive economic growth.
In a commentary note, Fitch Ratings said Kenyan authorities’ latest budget estimates remain broadly in line with its projections from July 2023, when the agency affirmed the sovereign’s rating at ‘B’ and revised the outlook to negative.
However, there remains a significant risk of further fiscal slippage, particularly if the exchange rate weakens further, the rating agency added.
“In July we said that a rapid increase in government debt/GDP, due to failure to narrow the budget deficit, sustained depreciation pressures, or increased risks to debt sustainability due to rising debt interest costs, could put downward pressure on Kenya’s rating.
“The government’s recent draft supplementary budget estimates highlight the risk of fiscal slippage, with the new deficit forecast for the fiscal year ending in June 2024 (FY24) being roughly 1pp greater than the original budget forecast of 4.4% of GDP.
“However, it remains broadly in line with the 5.5% deficit we assumed in our July assessment”.
The rating agency said the wider-than-budgeted deficit for FY24 has been driven largely by increased debt service, which the government now expects to reach about 5.7% of GDP, compared with the original budget’s projection of 4.8%.
This has been partially offset by a reduction in capital investment under the development budget. Domestic accounts payable reached about 4.0% of GDP for the national government and 1.2% of GDP for county governments as of end-FY23, up by about 12% and 8%, respectively, from end-FY22, though some of these payables may be disputed, it said in the note.
According to Fitch, Kenya’s external financing requirement is set to rise in FY24, partly reflecting a higher principal repayment burden.
The country’s repayment is now expected at about 3.5% of GDP against 3.0% of GDP in the original budget, mainly driven by currency depreciation. The total includes the USD2 billion Eurobond due in June 2024.
The shilling traded around KES/USD 150 at end-October 2023, compared with the expectation in July that it would reach about KES/USD 148 by the end of FY24.
Fitch said if the exchange rate depreciates significantly from current levels, it could add to Kenya’s debt servicing challenges, particularly in the near term
“When we affirmed Kenya’s rating at ‘B’ in July, we assumed that the government would be able to meet its financing obligations in FY24 through a combination of official lending, syndicated loans and a drawdown in official reserves”.
Kenya still has sufficient reserves to meet its external debt obligations falling due in the near term, with useable foreign-exchange reserves at USD6.8 billion as of 2 November, around 3.7 months of import cover.
Deploying reserves to redeem the Eurobond would reduce import cover, which could still contribute to a downgrade of Kenya’s rating depending on the extent of the drawdown and outlook for other sources of external financing, Fitch Ratings noted.
However, analysts believe some of the government’s planned additional external financing will also materialise. The government remains in talks with several external partners on financing, including the IMF, World Bank, Trade and Development Bank and African Export-Import Bank.
“We view the government’s target to secure KES1 trillion, which is about USD6.6 billion, or 6.3% of GDP, in foreign financing, including KES467 billion (around USD3 billion, or 2.9% of GDP) in commercial financing, as ambitious”,
Fitch said its baseline assumes around USD4 billion of external funding. The government is also exploring options for the upcoming Eurobond maturity, including a partial buyback, though it has not finalised the plan. Nigeria Receives N14.38T from Extractive Sector in 2Yrs –NEITI