Markets & Finance

Kenya told to rein in debt as growth seen at 6pc this year

tourists

Tourists arrive at the Moi International Airport in Mombasa last month. Economists say security in Kenya remains a significant risk and will continue to adversely impact tourism. PHOTO | KEVIN ODIT

Economists are forecasting a six per cent growth in 2015 but with a note of caution over Kenya’s growing national debt levels.

The 2015 outlook report by Citi and country rating by Fitch say the economy will grow by six per cent, thanks to lower fuel prices that are expected to result in falling general prices and dividend from investing in infrastructure projects.

But economists and analysts at both firms caution the government to reduce the level of borrowing and to keep a firm grip on spending.

“In recent years, Kenya has run significant twin deficits. And it is clear in 2014 that the government is still struggling to achieve fiscal consolidation, while at the same time current account has widened significantly.

“As a result, its debt profile has arguably deteriorated and this all spilled over into shilling weakness in late 2014 (although this was also partially driven by general US dollar strength),” says David Cowan, Citi Africa Economist, in the country outlook report.

Kenya’s debt stood at Sh2.372 trillion or 51.7 per cent of GDP as at August 2014 but this later fell to 50 per cent after the rebasing of the economy in September.

Fitch says one way the Treasury can manage the level of borrowing is by making sure funds are only sourced when they can be immediately used.

“While current debt levels are not unsustainable, Fitch highlights the risk of increased reliance on commercial debt, high carry costs if shovel-ready projects are not available, as well as repayment risk posed by large issue sizes,” says its report.

But Fitch has maintained a ‘B+’ rating with a stable outlook.

READ: Experts see economic growth at 6pc

Both Citi and Fitch say the poorly performing tourism sector due to insecurity is also helping to widen the current account deficit.

“Security in Kenya remains a significant risk and will continue to adversely impact tourism. Kenya has recorded over 135 attacks, for which Al-Shabaab has claimed responsibility, since military operations started in Somalia in 2011,” said Fitch. 

Data from the Kenya National Bureau of Statistics show that low tourists arrivals saw the economy grow at a slower pace in the third quarter of 2014 than in a similar period in 2013.

Poor performance by the sector over insecurity and Ebola fears saw the economy grow by 5.5 per cent in the third quarter of 2014 against 6.2 per cent recorded a year earlier.

“The contraction is attributable to both internal and external factors including insecurity concerns, negative travel advisories by some key tourist source countries and the perceived health risks in Kenya due to the country’s geopolitical location and connectivity with West Africa,” said KNBS.

“This resulted in an estimated drop, in beds occupancy of 60 per cent in coastal beach hotels and28 per cent in Nairobi’s high class hotels.”