Global rating agency Moody’s has downgraded Kenya’s credit scores, citing pressure from the country’s rising debts.
The assessment adds voice to rising concerns over the possible impact of heavy borrowing on Kenya’s future.
The ratings agency -- which had last October said it had placed Kenya’s B1 rating on review for downgrade due to persistent deficits amid high borrowing costs -- downgraded the issuer rating of the Kenya government to B2 from B1 but assigned a stable outlook.
“The drivers of the downgrade relate to an erosion of fiscal metrics and rising liquidity risks that point to overall credit metrics consistent with a B2 rating,” explained Moody’s of its move on Tuesday.
“The fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that Moody's expects to continue.”
But Geoffrey Mwau, director- general of budget, fiscal and economic affairs at the Treasury, disputed the downgrade, saying it did not reflect the country’s fundamentals.
Dr Mwau said the rating appears to be based on numbers from the last fiscal year that was marked by difficulties including drought and two elections that occasioned huge one-off costs. He added that Treasury’s plan to bring down the deficit to seven per cent in the current fiscal year from 8.9 per cent would allow proper management of resources going forward.
“These are just shocks that affected us and they are going to go down. We are winding up most of our big investments so now again even in terms of borrowing this will go down. I don’t think that analysis was well informed,” he said.
Dr Mwau cited a stable exchange rate and low inflation as indicators of the strong fundamentals. “If you look at all the fundamentals and what they are saying, you cannot reconcile them,” he said in an interview.
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Cost of borrowing
A rating downgrade is significant because it can affect how much it costs a government to borrow from international financial markets.
The Treasury has budgeted for Sh658.2 billion, or 45 per cent, of projected Sh1.44 trillion tax revenue for payment of domestic and external loans in the current financial year that ends in June.
In theory, a high credit rating means a lower interest rate (and vice versa). Moody’s rating scale runs from a high of Aaa to a low of C comprising 21 notches.
Moody's said it expects Kenya's fiscal metrics to continue to “deteriorate”, as large primary deficits combine with “worsening debt affordability and rising debt levels.”
Moody's forecasts government debt to increase to 61 per cent of GDP in fiscal year 2018/19 (the year ending in June 2019), from 56 per cent of GDP in FY 2016/17 and 41 per cent of GDP in FY 2011/12.
Recent forecasts indicate that Kenya’s borrowings could soon take the debt load past 60 per cent of GDP.
“Debt affordability is deteriorating as reflected by the increase in government interest payments as a share of revenue to 19 per cent in Financial Year 2017/18, from 13.7 per cent in Financial Year 2012/13,” said Moody’s.
Sh4 trillion mark
Kenya’s public debt crossed the Sh4 trillion mark at the end of March last year, reflecting the government’s sharp appetite for loans.
Treasury officials did not comment when reached on phone regarding the latest downgrade by Moody’s.
President Uhuru Kenyatta’s administration has said it will continue with large infrastructure-related development spending needs at a time the Kenya Revenue Authority (KRA) is battling subdued revenue collection.
President Kenyatta has said his administration will pay special attention to four key sectors he believes will drive Kenya’s economic agenda during his second term in office.
The youth, he has said, will be at the centre of the four-pillar plan, dubbed “the Big Four”, that includes food security, affordable housing, manufacturing and affordable healthcare.
Moody’s noted that, based on the realities, the large gross financing needs and reliance on commercial external debt will maintain government liquidity pressures.
“While the government aims to improve the efficiency of spending and revenues, such measures are unlikely to be effective enough to stem a weakening in fiscal trends,” said Moody’s.
Foreign currency bond
Moody's also lowered the long-term foreign-currency bond ceiling to Ba3 from Ba2 and the long-term foreign-currency deposit ceiling to B3 from B2.
Moody's also lowered the long-term local-currency bond and deposit ceilings to Ba2 from Ba1.
Moody’s assessment, however, breaks ranks with that of Fitch Ratings, which early this month 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+’.
Last month, the Central Bank of Kenya (CBK) warned the country’s headroom for more public debt is narrowing, advising the Treasury to instead adopt alternative forms of financing for mega projects.
Last August, an analyst at credit ratings agency Standard & Poor’s warned that piling public debt poses the largest risk to Kenya’s economy in the medium term.
Garder Rusike, an associate director in charge of sovereign rating and public finance at S&P Global Ratings, said then that Kenya could struggle to honour repayments in case of economic shock hence the need to cut the budget deficit and stabilise debt level.