Moody’s Investors Service (“Moody’s”), Tuesday, downgraded the issuer rating of the Government of Kenya to B2 from B1 and assigned a stable outlook. This concludes the review for downgrade that commenced on October 2, 2017.
According to Moody’s, the downgrade was as a result of an erosion of fiscal metrics and rising liquidity risks that point to overall credit metrics consistent with a B2 rating.
“The fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that Moody’s expects to continue,” a statement by the Investors Service said. “In turn, large gross financing needs and reliance on commercial external debt will maintain government liquidity pressures. While the government aims to improve the efficiency of spending and revenues, such measures are unlikely to be effective enough to stem a weakening in fiscal trends.”
Moody’s forecasts government debt to increase to 61 percent of GDP in fiscal year 2018/19 (the year ending in June 2019), from 56 percent of GDP in FY 2016/17 and 41 percent of GDP in FY 2011/12. Large infrastructure-related development spending needs combined with subdued revenue collection and a rising cost of debt will result in large fiscal deficits and keep government debt on an upward trend. Moody’s expects the primary deficit to remain above 4.0 percent of GDP over the next two years, after 5.3% of GDP in FY 2016/17.
Debt affordability is deteriorating as reflected by the increase in government interest payments as a share of revenue to 19 percent in FY2017/18, from 13.7 percent in FY2012/13. We expect a further rise to 20 percent in 2018. Kenya’s government external debt, which stood at 31.6 percent of GDP as of June 2017, continues to shift away from concessional debt toward commercial and semi-concessional debt, leading to higher financing costs. Between June 2013 and June 2017, the share of commercial external debt increased from 7 percent to 31 percent of total external debt. An increase in the stock of short-term domestic debt as a percentage of GDP also contributes to a rising interest burden.
However, Kenya retains strong fundamental economic strengths with a relatively diversified economy that holds strong growth potential. Moreover, Kenya has a relatively deep capital market and mature financial sector, which affords the government some capacity to issue domestically in local currency and with longer tenors.
Concurrently, Moody’s has lowered the long-term foreign-currency bond ceiling to Ba3 from Ba2 and the long-term foreign-currency deposit ceiling to B3 from B2. Moody’s has also lowered the long-term local-currency bond and deposit ceilings to Ba2 from Ba1.