The mounting public debt load and weak tax collection could see Kenya’s sovereign credit rating downgraded, international ratings agency Fitch has warned.
The agency on Monday announced it had put Kenya’s credit rating on a negative outlook from stable, signalling a possible downgrade over the next one to two years if the debt situation deteriorates.
“Fitch Ratings has revised the outlook on Kenya’s long-term foreign and local currency issuer default ratings (IDR) to negative from stable and affirmed them at ‘B+’ and ‘BB-’, respectively,” the firm said in a statement.
“The agency has also affirmed the short-term IDR at ‘B’ and country ceiling at ‘BB-’. The issue ratings on Kenya’s senior unsecured foreign and local currency bonds have been affirmed at ‘B+’.”
Lowering the country’s rating from the current “B” range could make it difficult for the government to borrow more funds or force it to pay higher interest charges on new debt issues.
Fitch’s “B” ratings indicate that material default risk is present, but a limited margin of safety remains.
It also signals that financial commitments are currently being met but capacity for continued payment is vulnerable to deterioration in the business and economic environment.
Fitch says failure to stabilise the public debt to gross domestic product ratio and narrow the current account deficit as well as a marked deterioration in the political environment and security could individually or collectively trigger a negative rating.
It picks out factors that could cause a positive rating as a “longer track record of prudent economic management and further regulatory reforms to foster an improved business environment and faster economic growth.”
Fitch’s warning comes at a time when the government is increasingly relying on external borrowing to fund its expenditure, including major infrastructure projects like the standard gauge railway (SGR), roads and energy.
The government last year raised $2.75 billion (Sh280 billion) by selling dollar-denominated sovereign bonds to global investors.
Treasury secretary Henry Rotich said the government would raise a further Sh340.5 billion from external financing to help plug the budget deficit in the current fiscal year.
Fitch says Kenya’s public finances have been on a steadily deteriorating trend since 2008, reflecting weak revenue performance, increasing infrastructure spending, and persistently high current expenditure.
Mr Rotich estimates that the budget deficit would reach 8.7 per cent of GDP in the current fiscal year, up from 8.2 per cent in the previous year.
The SGR alone accounts for a quarter of the overall deficit.
Fitch says Kenya’s revenue under-performance has previously been made up for by under-execution of capital projects.
The agency says the government’s plan to borrow up to Sh370 billion in the domestic market in the current fiscal year risks worsening its debt ratios.