Kenya's credit rating slash signals expensive foreign loans

This may prove a hurdle to President William Ruto's administration's plan to finance its huge budget deficit from international partners such as the World Bank and the International Monetary Fund (IMF).

Fitch said the downgrade reflects "Kenya's persistent twin fiscal and external deficits, relatively high debt, and deteriorating external liquidity, and high external financing costs."

It said this presently constrains access to international capital markets.

"The government faces elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion (Sh245.8 billion) Eurobond in June 2024, which combined with high current account deficits, will lead to sustained pressure on international reserves," said Fitch.

Treasury is trying to balance its debt portfolio after expensive commercial debts piled up and became expensive to repay, taking up more than 60 per cent of tax revenues.

New economic managers at Treasury led by CS Njuguna Ndung'u face the uphill task of stabilising government finances and bringing living costs under control.

Fitch however accorded the country a stable outlook saying this "reflects some progress with fiscal consolidation, which is supported by a $2.3 billion (280.6 billion) IMF programme, manageable near-term debt commitments and strong post-pandemic growth that is likely to continue over the medium term."

According to Fitch, the successive shocks of the coronavirus pandemic and the Russia-Ukraine war have even then contributed to a widening current account deficit and lower international reserves.

"Fitch forecasts the current account deficit to grow to 5.9 per cent of GDP ($6.9 billion (Sh847.9 billion) ) in 2022 and to remain at broadly the same levels in 2023 and 2024," it said.

"Despite IMF and other official disbursements, we forecast reserves to remain under pressure reaching $7.4 billion (Sh909.4 billion) at end-2023."

This would constitute a fall to three months of current external payments at end-2023, down from 4.8 months at end-2021, according to Fitch.

"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 per cent of current external receipts in 2024, up from 16.6 per cent in 2023, owing to the June 2024 $2 billion (Sh245.8 billion) Eurobond payment.

"Currently, our base case assumes that the government will meet its external debt obligations of $3 billion (Sh368.7 billion) in the fiscal year ending June 2023 (FY23) through a combination of official and commercial borrowing, which includes approximately $900 million (Sh110.6 billion) in IMF disbursements, a $750 million (Sh92 billion) World Bank budget support loan, and $300 million from the Eastern and Southern African Trade and Development Bank," noted Fitch.

The government also plans an additional $600 million (Sh73.7 billion) in syndicated loans from commercial banks.

"We also expect that the government will be able to meet its FY24 external debt obligations through disbursements from the IMF and other multilateral lenders, and through additional commercial borrowing," said Fitch.

"Strong growth and continued fiscal improvement are likely to see government debt continue to fall, but remain above 60 per cent of GDP," added Fitch.