Kenya is among African countries which are unlikely to face problems financing their fiscal deficit this year owing to a developed domestic debt market and relatively favourable ratings on the international market, Moody’s has said.
In contrast, the ratings agency’s latest Africa outlook report shows that commodity-backed economies such as Angola, the Republic of Congo, Gabon, Zambia and Mozambique will struggle to bridge their fiscal deficits due to lower earnings and more stringent financing conditions.
Kenya has one of the more developed domestic debt markets in Africa, with the government so far this fiscal year raising its deficit financing domestically without having to tap the international Eurobond or sovereign debt markets.
“In all non-commodity-dependent countries, we expect liquidity pressures to remain broadly manageable in 2017. Many of these countries will benefit from relatively developed and liquid domestic capital markets, and bilateral and multilateral financing, by varying degrees,” said the Moody’s report.
“Countries with the strongest institutional capacity are the most likely to be able to mobilise these resources. We expect an increase in financing for renewable energy projects given the international community’s focus on this sector.”
Kenya is targeting to raise Sh226 billion from the domestic market in the current fiscal year (2016/17) and Sh287 billion from the external market.
Estimates by Cytonn Investments show that by the end of 2016 the government was ahead of target on domestic borrowing, having taken up Sh169 billion.
In the next fiscal year (2017/18) the government expects to borrow Sh320 billion from the domestic market against Sh221 billion from the international market.
The ability to borrow domestically to finance the fiscal deficit will, however, expose the country to high interest on debt, whose sustainability has increasingly been called into question by economists.
“Kenya, Rwanda and Uganda will continue growth-supportive spending, but with higher risks to debt dynamics as they plan to finance relatively large deficits from domestic sources at higher interest rates,” said Moody’s.
Kenya has been among the countries looking to push through with fiscal consolidation (cuts), having revised its 2016/17 deficit downwards from Sh702.3 billion as per the original budget to Sh516.7 billion — equivalent to 6.9 per cent of GDP.
Moody’s says that efforts to consolidate across the continent could, however, face headwinds from subdued growth, potential weather shocks and political pressure to spend.
With Kenya heading to the General Election later this year, the government will be under pressure to expand its spending especially on infrastructure in order to fulfil promises made in 2012, while it is also facing higher wage demands from public sector workers.
In cutting the expected deficit for the current fiscal year, the Treasury relied on a downward revision of the development budget from the initial Sh820 billion to Sh606.5 billion, indicating difficulties in cutting the recurrent expenditure.