Kenya dropped on COVID-19 concerns

Kenya’s outlook has been dropped from stable to negative by Fitch Ratings on concerns of the impact of the coronavirus disease 2019 (COVID-19) crisis on the economy.

The rating agency has however maintained Kenya’s long-term foreign-currency issuer default rating (IDR) at B+. This is on the expectation that growth, macroeconomic stability and external financing options will balance the economic shocks from the COVID-19 crisis.

Fitch forecasts Kenya’s gross domestic product (GDP) growth to drop to 1% in 2020, as the slowdown in global trade and services impact Kenya’s export and tourism sectors.

The rating agency expects a 20% to 40% fall in travel receipts and remittances, which had risen to a total of 4.3% of GDP in 2019.

Kenya’s agribusiness exports are also expected to drop by over 30%, including horticulture, tea and coffee, which accounted for approximately 3% of GDP in 2019. The infestation of desert locusts brings an additional downside risk, as agriculture accounts for 25% of Kenya’s economy and between 40% and 50% of exports.

The spread of COVID-19 has so far been limited, with Kenya recording under 4000 cases and just over 100 deaths. However, the lockdown measures will drive a sharp contraction in the growth of Kenya’s domestic services sectors, the rating agency says.

Fitch expects the general government deficit to widen to 8.6% of GDP in 2020 – reflecting an additional hit to revenue from the COVID-19 shock itself.

Revenue has been hit by tax relief measures adopted by the government that cost an estimated 0.5% of GDP and COVID-19 related spending costing an additional 0.4% of GDP.

The rating agency believes the coronavirus shock will delay any significant narrowing of the fiscal deficit until at least the fiscal year ending June 2022. As a result, general government debt is expected to reach nearly 70% of GDP in 2021.

Kenya’s government debt to revenue ratio is expected to reach 350% in 2020, well above the B median of 259%.

Fitch expects government debt to GDP to begin levelling off in 2022. However, the government’s uneven track record in implementing fiscal policy brings significant risk.

The 2021 budget, delivered to parliament on 11 June 2020, includes expenditure cuts to offset lower revenue collection and targets a fiscal deficit of 7.5% of GDP.

This budget envisages cutting a total of 1.8% of GDP in overall expenditure, with 1.3% coming from current expenditure and 0.5% from capital expenditure (capex).

However, Fitch believes that the planned cut to current expenditure is ambitious. As such, the rating agency forecasts a slight narrowing of the fiscal deficit to 8.3% of GDP in 2021.

Despite Kenya’s position as a net oil importer and a fall in total imports, Fitch forecasts the current account deficit to widen to 5.4% in 2020, from 4.5% in 2019.

Net external debt will increase to 241% of current external receipts in 2020, twice the B median.

The economic fallout from the coronavirus will also have negative implications for corporate balance sheets and households’ financial standing, and, ultimately, for banking sector’s asset quality and profitability metrics.

Asset quality improved in 2019, but non-performing loans stood at 12.7% of total loans in February 2020, up from 12% at end-2019.

Private sector credit growth, which had risen to 7.1% in 2019 from 2.4% the previous year, is expected slow again in 2020 owing to the economic headwinds.

On the upside, Fitch expects Kenya’s GDP growth to recover to 4% in 2021 and to return to between 5% and 6% over the medium term.

Kenya grew by an average of 5.8% in 2010 to 2019, with growth only falling below 5% in the election years of 2012 and 2017 to 4.6% and 4.9%, respectively.

The rating agency expects inflation to average 5% in 2020 and 2021, remaining within the Central Bank of Kenya’s target of 5% plus or minus 2.5%.

Additionally, Kenya’s rising government debt is mitigated by favourable debt composition and manageable maturity profile.

Foreign currency debt accounts for less than half of total sovereign debt, compared with the B median of 60.5% in 2020.

Fitch estimates a total of $3 billion in external debt servicing in 2020, which is about 20% of current external receipts.

To meet those external financing needs, Kenya will receive approximately $3 billion in already scheduled disbursements to the government.

The remaining external financing needs, including a forecast current account deficit of $5.5 billion, will be met with assistance from the International Monetary Fund, which approved a $744 million disbursement.

This will also be met by an additional $300 million from the World Bank, and by drawing down Foreign exchange reserves, which stood at $8.4 billion, as of April 2020.

Fitch would consider downgrading the rating if Kenyan authorities fail to stabilise government debt to GDP ratio, after a further increase in 2020 related to the coronavirus shock.

The rating agency may also downgrade the rating if the current account deficit widens or net external debt increases.

A stabilisation of government debt to GDP ratio at or near current levels, would lead to an upgrade in the rating, according to Fitch.

Fitch would also consider upgrading the rating if there is a significant decline in Kenya’s net external indebtedness.

Meanwhile, the rating agency has also downgraded Kenya’s country ceiling to B+ from BB-.

This comes just after Moody’s dropped Kenya’s outlook from stable to negative, due to rising liquidity risks constituted by the country’s high gross borrowing needs.

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