Kenyas debt burden pushes country into negative credit rating

Kenya’s rising debt burden has pushed the country’s credit rating outlook into the negative from a previous stable rating.

Global based Moody’s Investor Service changed the country’s rating from B2 stable to B2 negative on Thursday noting Kenya’s rising risks to meet its borrowing requirements and debt payments.

“The negative outlook reflects the rising financing risks posed by Kenya’s large borrowing requirements which include amortization of external bilateral debt and the need to refinance a large stock of short-term domestic debt at a time when the financial outlook is deteriorating,” Moody’s noted in a statement.

The degraded rating pushes Kenya’s credit profile further into the non-investment grade meaning investors will price future debt issues by the country as those high risk.

A weaker rating will make it more difficult for the country to access funding in the international market and will likely result in higher interest charges on subsequent debt taken.

The investor service has attributed the lower rating to an erosion in Kenya’s revenue base against higher expected spending which leaves a greater financing gap pushing the appetite on borrowing.

The government has for instance implemented measures to cushion Kenyans against the Covid-19 pandemic including relief on income and vatable taxes which have driven down revenue collection abilities to fund spending.

Moody’s expects Kenya’s debt burden to grow to 70 percent of GDP or an equivalent Ksh.6.8 trillion by June 2021 and further projects the fiscal deficit to widen to 9.1 percent of GDP in the same period.

Moreover, pressure is expected to mount on debt servicing with the National Treasury expected to use up to 1.7 percent of GDP each year to 2022 or an equivalent Ksh.164 billion on principal payments alone.

The debt to revenue ratio is expected to hit 400 percent over the next year meaning there will be Ksh.4 worth of debt for every Ksh.1 of collected taxes.

Interest payments as a percentage of revenues are expected to reach 27 percent in the same period reducing available funds to cover government operations.

Faced by mounting pressure, the government has resulted to engage its creditors to restructure debt and provide relief to expenditure pressures.

However Moody’s warns the request for moratorium on payments and the extension of tenors to maturing debt must not involve commercial creditors least the country rating falls into junk status.

“Kenya will not participate in any debt relief initiative that requires the participation of private creditors which could further carry negative implications on the country’s rating,” the agency added.

The weaker ratings comes as Treasury Cabinet Secretary Ukur Yatani moves to re-profile Kenya’s debt towards concessional sources to reduce the pressure on debt servicing.

According the 2020/21 budget estimates tabled in Parliament last week, external commercial financing is expected to be lowered to Ksh.6.2 billion from an original Ksh.213 billion at the start of the 2019/20 budget cycle.

The target for project and semi-concessional loans has meanwhile been raised to Ksh.273.5 billion and Ksh.124.3 billion respectively.

The country’s debt stock stood at Ksh.6.28 trillion at the end of March.