New York, October 02, 2017 — Moody’s Investors Service has placed the B1 long-term issuer rating of the Government of Kenya on review for downgrade.
The decision to place the rating on review for downgrade was prompted by the following key drivers:
1) Persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness higher
2) Government liquidity pressures risk rising in the face of increasingly large financing needs
3) Uncertainties weigh over the future direction of economic and fiscal policy, in part due to evolving political dynamics
Moody’s review will focus on assessing:
1) The country’s medium-term fiscal trends, and the likely policy response to ongoing budgetary pressures
2) The effectiveness of the government’s medium-term financing plan in managing liquidity risks
3) The government’s overall credit profile relative to similar-rated peers
RATIONALE FOR INITIATING THE REVIEW FOR DOWNGRADE
HIGH PRIMARY DEFICITS AND BORROWING COSTS CONTINUE TO DRIVE GOVERNMENT DEBT HIGHER
Moody’s expects that Kenya’s government debt burden, which has risen to 56.4% of GDP in June 2017, up from 40.5% five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60% mark by June 2018.
Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0% of its revenues on interest payments, up from 10.7% five years ago.
A key focus of the review will be to assess the capacity and willingness of the government to address these budgetary challenges in a comprehensive, effective and timely manner.
INCREASINGLY LARGE FINANCING NEEDS RISK PRESSURING GOVERNMENT LIQUIDITY
Moody’s believes that the Kenyan government’s increasingly large financing needs risk putting pressure on its liquidity position. The expected step-up in principal payments in the next few years will drive financing needs further up from an already elevated level of 19% of GDP. A key area of focus in the rating agency’s liquidity analysis is the government’s increasingly large roll-over of Treasury Bills, which amounted to 9.4% of GDP in June 2017, and the external debt payments to private creditors, including the $750 million Eurobond due in June 2019.
At the same time, Moody’s notes that several factors support the government’s access to financing resources, which ultimately can mitigate government liquidity risk. The government benefits from a relatively deep and mature financial sector, which consists of banks, pension and insurance companies with a combined asset base of more than 80% of GDP. As such, the government has been able to issue debt instruments in local currency with particularly long maturities — the average maturity of domestic outstanding bonds was seven years as of August 2017. Moreover, the government holds roughly 6% of GDP in deposits, thereby providing a buffer in the event of adverse market conditions.
The review will assess the extent to which funding risks are sufficiently contained by the mitigating features.
UNCERTAINTIES OVER FUTURE POLICY DIRECTION AND IMPLEMENTATION
Moody’s views future policy orientations and implementation as particularly uncertain given the evolving political dynamics. The latest fiscal policy statement was released last March with the Parliament’s approval of the Budget for the fiscal year 2017-2018. Since then, while the Kenyan Treasury has updated on several occasions its expectations for a more adverse fiscal outlook, policy formulation has remained broadly unchanged as the country focused on the national elections.
Shortly after Kenya’s general elections on 8 August this year, the Supreme Court nullified the result of the presidential election, requiring a new vote within 60 days. Whether the new vote will allow the political process to return to normalcy is unclear and the absence of a decisive outcome could distract the government from fiscal and economic reforms that would address the current fiscal and socio-economic challenges.
The review will focus on assessing the country’s political configuration and whether it offers more visibility over the government policy orientation and implementation capacity.
WHAT COULD CHANGE THE RATING — DOWN
Moody’s would downgrade the rating if the review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
Moody’s would confirm the rating at B1 if the review were to conclude that the policy response offers the prospect for tempering the currently-anticipated upward trend in government debt and that liquidity risks are being effectively managed.
Source: Moody’s Investor Services