Kenya’s credit rating downgraded on debt woes

Kenya has earned yet another ratings downgrade over its rising debt vulnerabilities with the Standards & Poor’s (S&P) lowering the country’s sovereign rating this past week.

S&P lowered its long-term foreign and local currency sovereign credit ratings on Kenya to B from B+ even as it affirmed Kenya’s B rating on short-term issuance’s and a stable outlook.

In the report, the credit rating agency warned of rising debt vulnerabilities as the country plugs budget financing through borrowing against dwindling revenues and greater spending pressures.

“In our view, fiscal consolidation will likely proceed slowly. We project that in the fiscal year ending in June, the general government deficit will widen to 8.7 per cent of GDP before falling slightly to 7.7 per cent in FY 2022 before averaging 6.6 per cent between 2022 and 2024. The financing of these deficits, in turn, will raise domestic and external debt levels and increase external vulnerabilities,” S&P stated.

While institutions such as the World Bank, Treasury, and the International Monetary Fund (IMF) have projected a string growth rebound this year, S&P expected recovery to be hindered by a poor tourism season and continued pandemic-related restrictions to the services sector.

The ratings agency sees 2021 growth at 4.4 per cent, a sharp contrast to IMF’s higher projection of 7.6 per cent.

The agency sees the country falling back to fiscal consolidation plans in 2022 at the earliest as the pandemic continued to weigh heavily on the performance of the exchequer.

More borrowing

According to data from the National Treasury 2021 Budget Policy Statement (BPS) tabled in Parliament last week, Kenya is expected to borrow an estimated Ksh.930 billion in the financial year commencing in July.

The sum represents the 2021/22 fiscal deficit inclusive of grants. The deficit is set to be plugged through Ksh.267.3 billion in the next external financing and Ksh.662.8 billion in net domestic borrowing.

The Budget and Appropriations Committee (BAC) has nevertheless demanded the exchequer to re-calibrate its deficit funding plan in favor of external financing proposing an optimal balance.

This to move the net foreign financing ceiling to a higher Ksh.530 billion while lowering net domestic financing to Ksh.399.9 billion or an equivalent 57:43 ratio.

According to data from the Treasury’s Medium Term Debt Strategy (MTDS), Kenya’s public debt stock rose to Ksh.7.3 trillion at the end of 2020 representing about 65.6 per cent of GDP.

The bulk of loans were external at Ksh.3.8 trillion (31.4 per cent of GDP) while domestic loans amounted to Ksh.3.5 trillion.

The National Treasury has since requested Parliament to raise the debt ceiling from the current Ksh.9 trillion to accommodate additional borrowing.

“To accommodate the fiscal deficits on FY 2021/22 and into the medium term, the statutory debt limit has to be expanded,” Treasury stated in the MTDS.

Kenya’s debt was nevertheless deemed as sustainable according to an IMF analysis conducted earlier last year even as the red warnings flashed on risks to its sustainability.

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