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Fitch Says Kenya’s COVID-19 Measures Will Lead to Faster Increase in Debt

The economic crisis triggered by the coronavirus will halt Kenya’s fiscal consolidation and increase the country’s financing needs, Fitch Ratings says. The global rating agency expects the government to access the IMF’s Rapid Credit Facility, which would provide up to USD350 million (about 2% of government revenue) in concessional financing. We also believe that the country will conclude a larger IMF support program, but the shock still entails an increase in risks to Kenya’s fiscal and external positions.

Kenya is in discussions with the IMF about a new facility, which will provide additional official financing, since its Stand-by Agreement lapsed in 2018. The IMF noted “significant progress” and “broad agreement on the main principles of a plan” following its 19 February to 3 March mission to Kenya. The removal last year of the interest rate cap enacted in 2016 has helped Kenya move closer to an agreement with the IMF, but Fitch continues to view a path towards medium-term debt sustainability as the key to agreement on a new program, but the coronavirus crisis has increased the likelihood of an agreement being reached.

Kenya’s government was on track to narrow the fiscal deficit in the fiscal year to end-June 2020 (FY20) following several years of wider deficits and increased external borrowing to finance several large development projects. However, the government has announced a series of measures in response to the coronavirus, including various tax cuts and a faster repayment of pending bills to suppliers and of VAT refunds. Some of the tax cuts will be offset by new VAT and capital gains taxes introduced to Parliament on 6 April. But Fitch estimates that these measures, combined with the hit to revenue from lower growth, could lead to a widening of the fiscal deficit to 9% of GDP in FY20 if they are not further offset by new grants or spending cuts.

Fitch expects Kenya’s general government debt to continue rising through FY22 to reach about 70% of GDP. This is higher than our pre-coronavirus forecasts, which saw debt peaking at 65% of GDP. As domestic Treasury auctions are typically undersold, much of the increased borrowing in FY21 and FY22 will have to come from external sources, leading to an increase in Kenya’s external debt, which is already high compared with ‘B’ rated peers.

Fitch affirmed Kenya’s ‘B+’ rating in December 2019 in part due to the country’s strong and stable growth outlook. However, a failure to stabilise government debt/GDP levels or a widening of the current account caused by falling export receipts or remittance inflows could lead to a negative rating action.

Fitch now forecasts Kenya’s economy to grow by 3% in 2020, down from an estimated 5.6% in 2019, and by 4% in 2021. We expect that international travel to Kenya and tourism, which the World Bank estimates contributes 14% to Kenya’s GDP, will fall to near zero for several months. Kenya’s export sector, including horticulture and tea (40% of exports), will be affected by travel restrictions, border closings and falling eurozone demand.

The Central Bank of Kenya (CBK) has responded by cutting the main policy rate by 100 basis points to 7.25% and lowering banks’ reserve ratio to bolster domestic liquidity. The CBK has required commercial banks to provide loan relief, and to restructure loans to retail and corporate customers.

The global shock will also stress Kenya’s external balances. Tourism receipts and remittance flows were an estimated USD3.6 billion in 2019 (3.7% of GDP compared with a current account deficit of 4.2% of GDP). Kenya’s status as an oil importer will mitigate the external stress due to the fall in oil prices. Import compression will keep the widening of the current account to between 5% and 6% of GDP in 2020. Kenya’s flexible exchange rate will limit the draw-down of international reserves.