2020 continues to be a challenging year for governments particularly those in developing markets.
While their fiscal stimulus has been comparably lower to those in the developed world, these governments are facing a much higher debt burden in light of a sharp reduction in revenues.
According to the IMF, ‘about half of the low-income countries and several emerging market economies were already in or at highPublic Debt risk of a debt crisis, and the further rise in debt is alarming’.
Zambia is a good example of one of these countries having just last week defaulted on its foreign debt after it missed a payment of more than US$ 40.00 million.
These concerns may explain the push for the G20 debt service relief plan for vulnerable countries. This relief plan dubbed, Debt Service Suspension Initiative (DSSI), is expected to provide extra fiscal space in the near term for a number of eligible African governments.
The Kenyan government has thus far refrained from participating in the DSSI despite growing concerns over its debt sustainability.
These concerns are affirmed by elevated spending needs, linked to the COVID-19 response, amid underperformance in revenues which has led to a widening of the fiscal deficit towards double digits (FY2020/21 target = 7.50% of GDP) and record-high debt levels.
Kenya’s total public debt has risen sharply to around KES 7.00 trillion from KES 6.11 trillion at the start of the year.
Already, Moody’s credit rating agency stated that it will maintain Kenya’s negative credit rating into 2021 while the IMF and World Bank maintain that Kenya’s risk of debt distress is high.
A deteriorating credit outlook is expected to have negative implications on the Kenyan sovereign’s ability to access external debt financing should it choose to take advantage of improving global risk sentiment.
Coupled with the persistence of unfavorable political undertones linked to the Building Bridges Initiative (BBI), this could weaken the appeal of Kenya’s foreign-denominated debt with any fresh issues anticipated to carry a hefty premium.