Fitch Ratings, a leading provider of credit ratings, has said Kenya will find it challenging to stabilize its current debt levels.
The Agency said with the 2022 general elections looming on the horizon, Kenya will experience political difficulties associated with reining in the deficit.
Political pressure for higher budget transfers to Counties from the Central Government could add to the difficulty of curbing expenditure. Simultaneously, the debate around the Building Bridges Initiative and its proposed constitutional changes will detract from public finance reforms.
Weekly figures from the Central Bank of Kenya (CBK) shows that Kenya’s total public debt stood at KSh 7.1 Trillion in September 2020 from KSh 6.3 Trillion in March 2020 when the first COVID-19 case was reported in Kenya, a growth of KSh 0.8 Trillion in the space of six months.
Kenya has already sought credit from the International Monetary Fund (IMF) to shield the economy from effects of the COVID-19 pandemic, provide it with forex and assist in debt sustainability.
FItch on Kenya-IMF Deal
However, even if Kenya signs a deal with the IMF, implementation of the fiscal adjustments necessary to stabilize debt levels may prove difficult given challenging political circumstances, said Fitch Ratings.
Treasury CS Ukur Yatani has disclosed that Kenya is seeking US$ 2.3 Billion from the IMF for budgetary support. Kenya is expected to readjust its fiscal plan to cut its budget deficit, a tall order due to the Treasury’s spending pressures.
Kenya received US$739 million from the IMF in May 2020 through a Rapid Credit Facility (RCF). However, the country has not had a full IMF funding program since the last one lapsed in 2018.
During Fitch’s previous assessment of Kenya’s rating in June, 2020 it indicated that if Kenya’s budget deficit were brought down to 5%-6% of GDP on a sustainable basis, this could lead to positive rating action.
Fitch’s current forecast is that the deficit will widen to 8.3% of GDP in the fiscal year to June 2021 from 7.4% in 2020, due to COVID-19 shocks and election-related spending pressures.
Kenya is expected to have little difficulty in accessing IMF funding. Treasury has also increased its borrowing from the domestic money market to finance the 2020/21 budget deficit.
A deal with the IMF in 2021 will ease Kenya’s financing burden by providing access to relatively cheaper funds. It will also reassure private sector investors, enabling Kenya to issue debt on more affordable terms.
Yattani has already shown his backpedals on Kenya’s earlier decision not to participate in the G20’s Debt Service Suspension Initiative (DSSI).
Kenya’s potential benefits from DSSI participation, according to Fitch, could vary significantly depending on whether the scheme is extended beyond its current deadline of June 2021 and on the share of Chinese debt covered by the initiative.
Participation in the DSSI would be unlikely to have implications for the rating unless it extended to cover liabilities to private creditors, which so far has not been the case for any DSSI participant.
In November 2020, Fitch Ratings listed Ivory Coast, Ghana, and Kenya as among countries that may enter the international debt markets next year.
Fitch believes that DSSI participation in itself does not signal a high risk of debt-service rescheduling for private creditors.
The Agency said this is as investor sentiment towards the region improves after Ivory Coast’s issue of a Eurobond worth US$ 1.2 Billion.
It warns that other weaker sub-Saharan Africa nations will still face higher funding costs than the pre-COVID-19 pandemic, which will keep these countries from returning to the markets.
Ivory Coast’s Eurobond issue, which was five times oversubscribed, has been Sub-Saharan Africa’s first of the pandemic era.
In July this year, Fitch Ratings revised the Outlook on Kenya’s longer-term forex issuer default rating (IDR) to Negative. It also downgraded from Stable and affirmed the IDR at ‘B+.
Fitch has also downgraded Kenya’s Ceiling to ‘B+’ from ‘BB-