Fitch raises red flag over growing public debt load

• In a statement released Tuesday, Fitch affirmed Kenya’s rating at B+, with a stable outlook.

The Treasury should cut government spending to contain the growing public debt, an international credit ratings agency has said.

Fitch Ratings warns that Kenya’s debt to GDP ratio is drifting away from the 37 per cent average level of its peer countries, which could make it more expensive for the country to borrow money from the markets.

In a statement released Tuesday, Fitch affirmed Kenya’s rating at B+, with a stable outlook.

“The debt to GDP ratio remains high at 45 per cent in financial year 2011-2012 up from 42 per cent financial year 2009-2010, compared with the ‘B’ median of 37 per cent,” says Fitch Rating.

Standard & Poor’s, another international credit ratings agency, has also given Kenya a B+ rating.

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Fitch, however, warned that Kenya’s macroeconomic stability could worsen should the international oil prices, Kenya’s biggest import, increase and export earnings dip due to bad weather and a drop in global commodity prices.

Kenya’s national budget increased from Sh1.1 trillion in 2011/12 to Sh1.5 trillion in 2012/13. The huge budgets had a funding deficit of Sh228 billion and Sh249 billion respectively.

“To contain the debt burden, fiscal consolidation will need to become a priority next year with key debt ratios already above the ‘B’ median,” said Fitch.

Analysts at Citigroup said a peaceful election could reduce Kenya’s economic outlook.

“The balance of risk for Kenya at this stage is probably to the downside, but only at the margin. Certainly, debt dynamics did deteriorate, but not to a level that is a concern. With the MPC now more proactive in setting monetary policy, it is also a support for the rating,” said Citigroup analysts.

Fitch observed that Kenya’s exports are only able to cover 40 per cent of the import bill which makes the country vulnerable to an increase in the import basket or a drop in export earnings.

Sam Omukoko, managing director of rating firm Metropol Corporation, said that the impact of a downgrade for Kenya would be felt greatest by the average consumer.

A lower rating on Kenya would directly impact Kenyan companies borrowing from the international market since their ratings cannot be better than the government’s and this increased cost of loans would affect their cash flows.

“If this does happen, companies pass this cost to their customers and therefore goods and services become expensive. It is one of the causes of inflation particularly as it impacts on supplier credit,” said Mr Omukoko.