The economic crisis triggered by the coronavirus will increase Kenya’s debt levels owing to the huge financial needs that it will require, Fitch Ratings says. This is unless the Government does huge spending cuts and also access more external grants.
“We expect the government to access the IMF’s Rapid Credit Facility, which will provide up to US$450 million or about 2% of government revenue) in concessional financing. We also believe that the country will conclude a larger IMF support programme, but the shock still entails an increase in risks to Kenya’s fiscal and external positions,” said Fitch in a non-rating commentary.
Kenya is in discussions with the IMF about a new programme, which would provide additional official financing, since its Stand-by Agreement lapsed in 2018.
While Fitch continues to view a path towards medium-term debt sustainability as the key to agreement on a new programme, it says the coronavirus crisis has increased the likelihood of an agreement being reached.
The rating agency is critical of the Government’s moves, including various tax cuts and faster repayment of pending bills to suppliers and of VAT refunds. It mentions that these fiscal measures will be offset by new VAT and capital gains taxes introduced to Parliament on 6 April.
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 2020 if they are not further offset by new grants or spending cuts.
Fitch expects Kenya’s general government debt to continue rising through 2022 to reach about 70% of GDP. This is higher than the firm’s pre-coronavirus forecasts, which saw debt peaking at 65% of GDP.
With local Treasury auctions being typically under-subscribed, Kenya may have to rely on foreign borrowing, pushing up it external debt levels-already higher 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 stabilize 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.
On the list of most affected sectors include international travel to Kenya and tourism, which the World Bank estimates contributes 14% to Kenya’s GDP. Their contribution 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 global shock will also stress Kenya’s debt levels. The only reprieve remains falling oil prices which will keep narrow the current account deficit to between 5% and 6% of GDP in 2020.