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Fitch affirms Kenya at ‘B-‘, cites stable outlook

The move comes days after Moody's revised Kenya's credit rating from negative to positive citing a potential ease in liquidity risks and improving debt affordability

Fitch Ratings has affirmed Kenya’s long-term foreign-currency Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook.

According to the rating agency, Kenya’s ‘B-‘rating reflects strong medium-term growth prospects, a diversified economy and recent strengthening of the monetary policy framework. It also added that the rating is constrained by weak governance, high debt servicing costs, a significant level of informality constraining government revenues and high external indebtedness underpinned by challenges to fiscal consolidation, despite increased efforts to narrow the budget deficit.

“The Stable Outlook reflects Fitch’s expectation that continued strong official creditor support will help alleviate near-term external liquidity pressures, although the sovereign’s funding needs will remain large and are expected to rise. These pressures have eased following the February 2024 Eurobond issuance and buyback of USD1.44 billion of a USD2 billion Eurobond that was set to mature on 24 June 2024 in February,” it said.

Additionally, strong official disbursements and remittances have contributed to recent currency appreciation (22% against the US dollar in 2024), moderating the external debt servicing burden, as about 55% of the government’s debt is foreign-currency denominated.

The move comes days after Moody’s revised Kenya’s credit rating from negative to positive citing a potential ease in liquidity risks and improving debt affordability.

However, while President William Ruto and National Treasury Cabinet Secretary John Mbadi have welcomed the rating as a sign the country is on the right track, the African Peer Review Mechanism (APRM) has faulted Moody’s for giving incorrect ratings.

It noted that last July, the agency had thrown the country’s rating into junk territory following the collapse of the Finance Bill 2024.

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It August, Fitch also downgraded Kenya’s sovereign rating to “B-” from “B” on Friday, citing heightened risks to the country’s public finances for similar reasons.

In its latest rating, however, London-based Fitch says socio-political tensions have eased following the government’s withdrawal of the Bill, which had proposed tax hikes that sparked violent social protests in June-July 2024, noting that President Ruto has since formed a broad-based government and improved public engagement to enhance understanding of the importance of the fiscal consolidation strategy.

“However, we view the risk of renewed social unrest as high over the short term due to persistent socio-economic challenges, complicating fiscal consolidation efforts and posing risks to economic activity,” it added.

“We forecast gross external financing needs will decline to 6.3% of GDP in 2025, from 7.5% of GDP in 2024, due to projected lower fiscal deficit and debt amortisation and improved external liquidity. Government external debt service (including amortisation and interest) is expected to moderate in the fiscal year ending June 2025 (FY25) to USD4.1 billion (3.1% of GDP), from USD5.4 billion (4.6% of GDP) in FY24, but will exceed USD5 billion in FY26 through to FY29, sustaining large financing needs,” said Fitch.

Fitch also says it anticipates further slippage, with the budget deficit reaching 4.8% of GDP in FY25, 1.5pp higher than the government’s initial budget target and 0.4pp above its revised target.

“Notwithstanding efforts to cut spending, we expect expenditure to remain high, driven by higher debt servicing, increased social spending amid civil pressures, and new spending pressures from collective bargaining agreements.”

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It further noted that government plans to reduce expenditure by 0.6% of GDP to offset some of its withdrawn revenue-raising measures (estimated at nearly 2% of GDP). Fitch assumes that the deficit will be financed through a mix of domestic and foreign borrowing, with nearly 60% sourced domestically, sustaining high interest costs, and shortening maturities.

“The government plans to secure about USD5 billion (nearly 4% of GDP) through official and commercial borrowing in FY25, with half of this sourced from multilateral creditors, including the final USD0.9 billion disbursement from the IMF programme ending in April 2025. It also plans to issue a sustainability-linked bond, although details are unclear. The expiration of the IMF arrangement introduces uncertainty over subsequent financing flows. Fitch anticipates that negotiations will lead to a new funding arrangement, but the timeline is uncertain,” it said.

Despite the government proposing that additional tax measures will contribute about 0.3%-0.4% of GDP to revenue in FY25, Fitch’s maintains a conservative revenue outlook due to its expectation of revenue shortfalls consistent with Kenya’s record of underperformance and gaps in public financial management. Underperformance in revenue continued in 1HFY25, which we estimate at 6.4% below target on a pro rata basis, it notes.

“The government also continues to accumulate pending bills, with the stock of domestic arrears rising to KES528.4 billion (3% of GDP) at end-September 2024, from KES516.3 billion at end-June. Fitch projects that the revenue/GDP ratio will rise in FY25-FY26, averaging 17.7%, which is below the government’s initial target of 18.4%.”

Fitch also notes that revenue shortfalls have led to greater recourse to more expensive borrowing from external commercial creditors and the domestic market.

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“The Central Bank of Kenya’s (CBK) easing policy stance since August 2024 has helped lower average domestic yields in recent months. Nonetheless, they remain elevated, reflecting ongoing revenue constraints. We project government interest payments/revenue to exceed 32% in 2025 (from 31 % in 2024), more than double the ‘B’ median forecast of 15%, and to remain high in FY26 at a similar level (‘B’ median 14.6%),” it said.

 

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