Capital Markets

Fitch warns of debt rise as shilling falls

The National Treasury building
The National Treasury building. FILE PHOTO | NMG 

Exchange rate depreciation is a major risk to debt sustainability in Africa this year and could see some exposed countries such as Kenya receive a credit downgrade, rating agency Fitch has warned.

The agency said the impact of exchange rate depreciation on the debt denominated in foreign currency would account for nine per cent of the increase in the debt stock on the continent.

Kenya’s public debt currently stands at Sh6.65 trillion, 52.6 per cent of it being in foreign loans (Sh3.49 trillion).

The Treasury had earlier estimated that the country would spend an equivalent of Sh147.6 billion on foreign loan interest payments in the current fiscal year, but this will likely go up now because the shilling has depreciated by 6.6 per cent against the dollar since the beginning of the year.

In the current fiscal year, Kenya is facing a budget deficit of Sh823.4 billion, which the Treasury will finance through net domestic borrowing of Sh473.6 billion and net external borrowing worth Sh349.8 billion.


The deficit could, however, widen if as expected the country is unable to meet its revenue projection for the year, due in part to the Covid-19 disruptions of the economy.

“Potential drivers of downgrades include failure to stabilise government debt/GDP… signs of acute fiscal financing stress or heightened risk of default or restructuring of market debt instruments…and widening of current account deficits or increases in net external debt, or sharp falls in forex reserves and the emergence of strains on external financing,” said Fitch.

Fitch last month revised Kenya’s economic outlook to negative from stable, pointing that the coronavirus shock will drive a sharp economic slowdown and deterioration in the budget deficit this year, against a background of a weak track record of fiscal consolidation.

Two weeks ago, fellow global ratings agency S&P also lowered its outlook on Kenya to negative from stable pegged on the expected declined GDP growth.

A negative outlook indicates that a country is at risk of a rating downgrade should the underlying causes persist. This makes it more expensive for a country to borrow from the international market, due to the heightened risk perception.

Fitch said that weak credit fundamentals associated with many African countries generally reduces their debt tolerance and resilience, leaving them more vulnerable to the global coronavirus shock.