EconomyKenya Gets Lower Sovereign Rating Citing Elevated Debt Levels

Kenya's new currency notes held by the CBK Governor Dr. Patrick Njoroge.
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Kenya has been assigned a “B+” rating from Agusto & Co. Limited, a Pan-African Credit Rating Agency and a leading provider of industry research and knowledge in Nigeria & Sub-Saharan Africa.

The lower rating was attributed to Kenya’s elevated debt levels, contraction of the Country’s GDP in 2020 on account of the COVID-19 pandemic as well as the deterioration of the Kenyan Shilling against major trade currencies.

However, Agusto & Co. Limited said they view positively Kenya’s well-diversified economy with a resilient Agricultural sector (despite the emergence of COVID-19 and the invasion of locust during the year) as well as its position as the leading business hub within the East African Region.

In 2020, Kenya recorded its first recession in nearly two decades which was attributed to the adverse impact of the COVID-19 containment measures instituted by the government during the year. Kenya’s services sector -particularly tourism – suffered the most during the year as a result of the lockdown, which resulted in a near cessation of international travel into Kenya.

Overall, Kenya’s real gross domestic product (GDP) contracted by an estimated 0.2% in 2020 compared to the 5.4% growth achieved in 2019.

Looking ahead, Agusto & Co. expects an economic recovery in 2021 supported by Kenya’s resilient Agricultural sector and improvement in hospitality, tourism and export of tea, coffee and flowers.

The rating agency said the ongoing vaccination rollouts and easing of the government’s lockdown measures will encourage a resumption in economic activities with an increase in trade, private consumption and investment.

Agusto and Co., therefore, estimate the country to record a 3.8% Growth in GDP in 2021. Nonetheless, it said the services sector especially tourism, will require a longer-term recovery due to hesitant international travellers, who are cautious of the persistence of the pandemic.

Average inflation rose marginally to 5.29% during the year from 5.2% in the prior year driven by higher food prices and transportation costs (on account of the cap placed on the seating capacity of Kenya’s public transport made up of privately owned minibuses and taxis, which has now been eased.

The rating agency projects inflation to remain in the single-digit territory around 6% hinged on the expected increase in food prices as well as rise in the global price of crude oil impacting local petrol pump prices.

The Kenyan Shilling depreciated against the United States Dollar (by 5%), Sterling Pound (by 8%) and Euro (by 12%) in the period under review – predicated on the increased demand for foreign currency by citizens as a safety buffer, in addition to the drop in foreign currency receipts from the service sector (principally tourism).

The existing long-run inflation rate differential of 6% between the country and the United States of America backs the rating agency’s expectation of further modest depreciation of the Kenyan Shilling in the short to medium term.

Nonetheless, the Central Bank is expected to continue to absorb the shock of these depreciations in a bid to keep the currency steady. Kenya’s total revenue (including grants) improved slightly by 1.9% to Kes 1.75 trillion in 2019/2020, of which tax receipts accounted for 79%.

The rise in government’s aggregate spending by 5.4% year-on-year to Kes 2.6 trillion, however, outstripped revenue growth. The resultant deficit was financed by external debt and domestic debt in the ratio of 52.5 to 47.5%

The rating agency estimates revenue to further improve to Kes 1.9 trillion in the 2020/2021 fiscal year, largely supported by the continued reopening of businesses and tourist activities.

 

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