IHS Markit has downgraded Kenya’s short-term sovereign risk rating to 40/100 (BBB- on the generic scale) and the medium-term sovereign risk rating to 60/100 (B- on the generic scale). The outlook has been left unchanged at Negative.
Wide twin deficits, combined with a rising short-term external debt burden, are likely to widen Kenya’s external liquidity needs in the short to medium term, while total foreign-exchange earnings are unlikely to show a strong recovery as global oil prices trend up and tourism flows to the country remain muted.
IHS Markit’s estimates suggest that Kenya’s average fiscal deficit as a percentage of GDP for the next three years will stay at around 6.5%. The negative impacts on government revenue related to the coronavirus disease 2019 (COVID-19) pandemic, combined with limited spending cuts ahead of the planned constitutional referendum in 2021 and a general election in 2022, underline the fiscal expectations. This will leave public-sector debt at levels close to 55% of GDP over the medium term. Kenyan authorities have already announced their intention to amend the overall debt ceiling to accommodate the rising debt levels. Furthermore, close to half of the government’s stock of debt is external debt, exposing the country to foreign-exchange and external financing risks.
The current-account deficit is expected to widen to over 6% of GDP over the medium term on the back of rising oil prices and the lag in tourism receipts as COVID-19 lingers in sub-Saharan Africa given the slow rate of vaccine rollouts.
Kenya’s external debt as a percentage of total foreign-exchange earnings is expected to remain elevated at 145% over the next three years. The crude external financing requirement consists of around 55% from the current-account deficit, 30% short-term debt, and 20% debt servicing. External financing includes a staff-level agreement with the International Monetary Fund (IMF) of USD2.4 billion, funding from the World Bank, a planned Eurobond issuance of USD1.1 billion in 2021, as well as further multilateral and bilateral funding. Of particular concern is the planned refinancing of upcoming syndicated loan maturities and a previously issued USD2-billion Eurobond. Kenya has an estimated USD6 billion in Eurobonds outstanding.
IHS Markit has revised Kenya’s real GDP growth forecast to 4% in 2021 as global growth rebounds. The agricultural and agro-processing sectors are expected to underpin growth, while the historically strong services sector will take some time to recover as tourism lags.
IHS Markit maintains the Negative outlook for Kenya’s short- and medium-term sovereign risk ratings. The Negative outlook reflects the economy’s vulnerability to the unfolding COVID-19 pandemic and slow rollout of the vaccine programme in the region, which could delay the rebound in Kenya’s services sector. Climate change and natural disasters such as locust infestation also pose an ongoing risk to the country’s agricultural sector and key exporting commodities such as coffee.
The risk of fiscal and public-sector debt target overruns remains high as political developments historically impede fiscal consolidation efforts. The USD2.4-billion IMF support programme will set solid anchors for fiscal targets in future and mitigate this risk somewhat.