Kenya’s rating improves as Fitch sees better growth and deficit reduction

What you need to know:

Fitch forecasts Kenya’s general government fiscal deficit to narrow to 7.5 per cent of GDP this financial year.

Fitch Ratings has revised the outlook on Kenya’s Long-Term Foreign- and Local-Currency Issuer Default Rating (IDR) to stable from negative and affirmed the IDRs at ‘B+’.

The agency said the revision reflects its assessment that the country’s public debt/GDP trajectory will stabilise as well as the expected strengthening of GDP growth in 2018, following a year of political and fiscal shocks.

“Kenya’s fiscal deficit is likely to narrow following several years of expansionary policy,” it said.

“This shift towards fiscal consolidation will help to stabilise public debt/GDP levels and anchor Kenya’s macroeconomic framework.”

It noted that general government debt as a percentage of GDP increased to 58 per cent at the end of the fiscal year ending June 2017, from 40 per cent at end 2012 financial year.

“Fitch expects that debt/GDP will increase slightly to 59 per cent of GDP in the financial year 2018 and then level off as the primary budget balance approaches the debt-stabilising level, which Fitch estimates at approximately at minus 3 per cent of GDP.”
The agency said it forecasts Kenya’s general government fiscal deficit to narrow to 7.5 per cent of GDP this financial year, from 8.9 per cent in the last financial year.

“The forecast is larger than the 6.5 per cent of GDP target published in the FY18 Budget to reflect revenue underperformance and a number of one-off expenditure overruns, including food imports and election-related spending,” it said.

READ: IMF to review Kenya’s debt, deficit reduction measures

In the recently-released Budget Policy Statement, the Treasury forecasts the fiscal deficit to narrow to six per cent of GDP in the next financial year and to continue falling to three per cent by 2022.

“In Fitch’s view, this level of consolidation is unlikely, but the agency expects the deficit to begin shrinking as major infrastructure projects are being completed and tax administration reforms raise government revenue,” said Fitch.

Fitch expects the shift toward fiscal consolidation over the medium term to come from reining in high capital expenditure, although there are risks this may not materialise.