Kenya’s issuer and senior unsecured ratings have been affirmed at B2, by Moody’s Investors Service due to its relatively large and diversified economy with high growth potential.
Fitch has however kept Kenya’s outlook at negative due to on-going downside risks to the government’s efforts to deliver fiscal consolidation and reduce liquidity risk.
Kenya’s economic strength is supported by a relatively diversified economy with high growth potential at around 6%, which provides some capacity to absorb economic shocks.
The economy has grown robustly, averaging 5.8% real gross domestic product (GDP) growth between 2010 and 2019.
In 2020, the coronavirus disease 2019 outbreak and related containment measures had a severe impact on activity in almost all sectors of Kenya’s economy, with tourism among the hardest hit.
Moody’s expects Kenya’s growth rate to return to its long-term average of around 6% in 2021 and 2022, resulting in limited permanent scarring. In turn, a relatively stable economy would limit the risk of a sudden decline in the government’s revenue base.
Kenya also benefits from a relatively deep domestic financial market which supports domestic, local currency debt issuance with longer tenors, alongside short-term debt issuance.
Over the past year, the Kenyan government has improved the structure of its domestic debt, reducing the share of short-term treasury bills. This has extended the average maturity and reduced rollover needs.
The share of treasury bills declined to 25% of total domestic debt in 2020, or 8.3% of GDP, down from 31% of total debt and 9.2% of GDP in 2019. The average term to maturity on the domestic debt stock stood at 5.5 years, as of 30 June 2020, an increase from 4.7 years compared with a year earlier.
Meanwhile, Kenya’s creditworthiness remains constrained by institutional and governance challenges, as evidenced in weak fiscal policy effectiveness.
Fiscal policy effectiveness has proven weak, as exhibited by the deterioration in fiscal metrics and erosion of the revenue-to-GDP ratio, which has limited the government’s ability to narrow the fiscal deficit.
The negative outlook on Kenya’s rating primarily reflects downside risks to the fiscal outlook, which would worsen its already high debt and interest burdens. This could in turn increase financing risks if it is unable to deliver on ambitious fiscal consolidation targets set as part of the International Monetary Fund (IMF) program.
Kenya plans a gradual fiscal consolidation that will limit the deterioration in the sovereign’s debt and interest burdens. In the near term, fiscal consolidation will rest primarily on the efficacy of tax measures already taken by the government and the withdrawal of crisis-related spending.
However, Kenya’s mixed track record in terms of fiscal consolidation suggests achieving the government’s ambitious fiscal consolidation targets over a multi-year timeframe will prove difficult.
Taking into account these challenges, Moody’s expects the fiscal deficit to narrow gradually, from 8.7% of GDP in fiscal 2021 to 6.8% of GDP by fiscal 2023.
Moody’s also expects the debt and interest burdens to peak by 2023, at 72.6% of GDP and around 28% of revenue, respectively. This is before declining very gradually, while remaining above the median for B-rated sovereigns.
With the agreement on an IMF program providing a tangible backstop, Kenya’s immediate financing risks have eased. This is due to slightly lower gross financing needs and expanded access to a diverse funding mix.
However, a slower pace of fiscal consolidation than Moody’s currently expects would increase financing needs and leave Kenya vulnerable to tightening financial market conditions.
Moody’s expects Kenya’s gross financing needs to decline to around 18% of GDP in fiscal 2022. The decline in gross financing needs reflects smaller fiscal deficits, savings from participation in the G-20 Debt Service Suspension Initiative (DSSI), and a reduction in domestic treasury bills.
The rating agency expects Kenya to meet its gross financing needs through a diverse funding mix. This includes external concessional and commercial borrowing and with greater reliance on the domestic debt market. If achieved, Kenya’s already weak debt affordability metrics would not deteriorate further.
However, failure to deliver on the government’s fiscal consolidation would increase liquidity risk. This is particularly if this were accompanied by an increase in external commercial borrowing or short-term domestic debt issuance.
This would risk reversing some of the improvements in the government’s debt structure and financing over the past year and leave the sovereign more vulnerable to shifts in financing conditions.
Moody’s would change the outlook to stable if the delivery of fiscal consolidation measures increases confidence the debt and interest burden will stabilise at levels consistent with the B2 rating.
The rating agency would also upgrade the rating if there is a more durable improvement in government fiscal metrics.
Moody’s would consider downgrading the rating if debt metrics were to deteriorate more than currently expected.
A tightening of financing conditions, which contributes to a rise in borrowing costs and challenges the government’s ability to refinance maturing debt would also lead to a downgrade.
Meanwhile, Moody’s has also affirmed Kenya’s local currency and foreign-currency country ceilings remain at Ba2 and Ba3, respectively.
This comes after Fitch affirmed Kenya’s long-term foreign-currency issuer default rating (IDR) at B+, based on a track record of strong growth and relative macroeconomic stability, earlier in 2021.