Fitch Revises Kenya’s Outlook to Negative Cites Weak Track Record of Fiscal Consolidation

Fitch expects Kenya’s economy to slow to 1 percent in 2020, as the slowdown in global trade and services

President Uhuru Kenyatta and First Lady Margaret Kenyatta I arrive at Nairobi Terminus for the official launch of Phase 2A of the Standard Gauge Railway. Phase 2A stretches from Nairobi to Suswa. I Oct 16, 2019

Fitch Ratings on Friday revised Kenya’s outlook to ‘negative’ from ‘stable’, stating that the coronavirus pandemic will drive a sharp economic slowdown and exposed the challenges associated with a high public-debt burden.

“Deterioration in the budget deficit and government debt/GDP ratio in 2020, against a background of a weak track record of fiscal consolidation,” said the rating agency.

Fitch expects the country’s economy to slow to 1 percent in 2020, as the slowdown in global trade and services impact Kenya’s export and tourism sectors. 

“We expect more than a 30 percent fall in Kenya’s agribusiness exports, including horticulture, tea and coffee, which accounted for approximately 3 percent of GDP in 2019. Likewise, we expect a 20 percent-40 percent fall in travel receipts and remittances, which had risen to comprise a total 4.3 percent of GDP in 2019.”

“We believe the coronavirus shock will delay any significant narrowing of the fiscal deficit until at least the fiscal year ending June 2022 (FY22). As a result, we forecast general government debt to reach nearly 70 percent of GDP in FY21, just above 2021 ‘B’ median and well above the end-FY12 level of 39%. We expect government debt/GDP to begin levelling off in FY22, but the government’s uneven track record in implementing fiscal policy brings significant risk,” they add.

As a result, Fitch Ratings forecast Kenya’s government debt to revenue ratio will reach 350 percent in FY20, well above the ‘B’ median of 259 percent.

Separately, in May Moody’s Investors Service revised the outlook on Kenya’s rating to negative from stable citing the country’s rising risks to meet its borrowing requirements and debt payments.

Commenting on the latest rating Economic Analyst Reginald Kadzutu via his Twitter feed he says “That is what happens when you can’t attract investment funds (FDI) into the country and depend on debt, because of living beyond your means on non-performing “infrastructure” projects, with no corresponding growth in capital accumulation to support future growth.”

Treasury Cabinet Secretary Ukur Yattani

National Treasury projects that GDP growth will slow to 2.50 percent in 2020, the slowest pace in nearly ten years with an estimated fiscal budget of 8.3 percent from the previous figure of 6.3 percent.

The fiscal deficit is equivalent to Ksh 840.6 billion and Treasury says it will be financed through external and domestic financing.

The government targets to increase domestic borrowing to Ksh 493.40 billion (Up 27 percent ) and reduce external borrowing to Ksh 347.00 billion. 

Treasury’s Cabinet Secretary Ukur Yattani has maintained that Kenya’s public debt remains sustainable, but ‘need to be cautious about future debt accumulation.’

“This should reduce the currency risk for the sovereign that has in part contributed to the surge in public debt,” according to NCBA Research team. 

“However, this may see a rise in interest rates in the period as banks shift liquidity to the sovereign in risk aversion. This comes against a backdrop of continued restructuring of loans, with negative ramification for banking sector liquidity,” they add.