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Fitch Revises Kenya’s Outlook to Negative; Affirms at ‘B+’

Fitch Ratings has revised the Outlook on Kenya’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘B+’. Fitch has also downgraded the Country Ceiling to ‘B+’ from ‘BB-‘.

The revision of the Outlook on Kenya’s IDRs reflects Fitch’s view that the coronavirus shock will drive a sharp economic slowdown and deterioration in the budget deficit and government debt/GDP ratio in 2020, against a background of a weak track record of fiscal consolidation.

Fitch forecasts Kenya’s GDP growth to slow to 1% in 2020, as the slowdown in global trade and services impact Kenya’s export and tourism sectors. The firm expects more than a 30% fall in Kenya’s agribusiness exports, including horticulture, tea and coffee, which accounted for approximately 3% of GDP in 2019. The spread of COVID-19 has so far been limited, with Kenya recording under 4,000 cases and just over 100 deaths. However, the lock-down measures will drive a sharp contraction in the growth of Kenya’s domestic services sectors.

Fitch says, Kenya’s public finances were already a rating weakness and the analysts believe the coronavirus shock will delay any significant narrowing of the fiscal deficit until at least the fiscal year ending June 2022 (FY22). As a result, they forecast general government debt to reach nearly 70% of GDP in FY21, just above 2021 ‘B’ median and well above the end-FY12 level of 39%.

On the FY21 budget, delivered to parliament on 11 June, which included expenditure cuts to offset lower revenue collection and targets a fiscal deficit of 7.5% of GDP. Fitch says, the budget envisages cutting a total of 1.8pp of GDP in overall expenditure, with 1.3pp coming from current expenditure and 0.5pp from capex.

”The plan to cut capital expenditure is credible, given the overall direction of Kenya’s fiscal policy from big infrastructure development projects towards President Kenyatta’s Big Four agenda of food security, affordable housing, increasing manufacturing, and universal healthcare. However, we believe that the planned cut to current expenditure is ambitious. The Finance Bill 2020 introduces some new revenue measures and proposes to lower or remove some existing tax exemptions. This will contribute to higher revenue over the medium term, but most of the measures will not have an immediate impact.” the rating agency said in a statement.

Kenya’s ‘B+’ IDRs also reflect favorable growth potential, a track record of relative macroeconomic stability and the presence of a range of external financing sources. This is balanced against high and rising public and external debt levels, and GDP per capita and governance indicators that are below the ‘B’ range medians.

Kenya’s rising government debt is somewhat mitigated by favorable debt composition and manageable debt maturity profile. Foreign currency debt accounts for less than half of total sovereign debt, compared with the ‘B’ median of 60.5% in 2020.

Fitch estimates a total of USD3 billion in external debt servicing (20% of current external receipts) in 2020. To meet those external financing needs, Kenya will receive approximately USD3 billion in already scheduled disbursements to the government. The remaining external financing needs, including a forecast current account deficit of USD5.5 billion, will be met with the help of an IMF Rapid Credit Facility approved in April that will disburse USD744 million in 2020 and an additional USD300 million from the World Bank, and by drawing down on FX reserves, which stood at USD8.4 billion (5.1 months of current external payments) as of end-April 2020.

Fitch expects GDP growth to recover to 4% in 2021 and to return to between 5% and 6% over the medium term. Kenya grew by an average of 5.8% in 2010 to 2019, with growth only falling below 5% in the election of years of 2012 and 2017 (to 4.6% and 4.9%, respectively). We forecast inflation to average 5% in 2020 and 2021, remaining within the Central Bank of Kenya’s target of 5% plus or minus 2.5pp. This will allow the central bank to maintain an accommodative monetary policy that supports the growth recovery.