Kenya’s credit rating drops to negative after debt pileup

The country’s credit rating outlook was lowered to negative from stable because of elevated risks from currency depreciation and a widening budget deficit, Standard & Poor’s said.

Nairobi Securities Exchange (NSE) trading floor. Kenya's low fiscal position and mounting debt stock influenced the negative outlook.

The country’s rating was affirmed at B+, four levels below investment grade, the New York-based firm said in a statement. The drop in rating comes even as Government announced that it will cut on its budgetary spending to address liquidity crunch.

National Treasury Cabinet Secretary Henry Rotich on Monday announced the Government is re-evaluating the 2015/2016 financial plan to identify non-priority areas and consolidate spending to more crucial areas of the economy to give strong indication of the hard economic times the country is experiencing.

“The negative outlook reflects our opinion that Kenya’s low fiscal position is structurally weakening and that this will feed into a mounting debt stock, which could also increase external vulnerabilities,” Standard and Poor said in the statement.

The change in outlook follows a similar move by Fitch Ratings in July. Kenya, the world’s largest exporter of black tea and the biggest economy in East Africa, is facing a number of challenges including attacks by Islamist militants that have scared off tourists and changing weather patterns, which have affected farming output.

Kenya’s government and the World Bank both reduced their growth forecasts for the $55 billion economy last week. The Washington-based lender projects expansion of 5.4 per cent this year, compared with an estimate of six per cent in December, while the Treasury is more optimistic, predicting six per cent growth, down from a projection of 6.5 percent previously.

Kenya’s debt is equivalent to 45 per cent of its gross domestic product, a figure that could swell to 60 per cent by the fiscal year through June 2017, said Standard & Poor’s.

The country sold an inaugural Eurobond last year, raising a total of $2.75 billion (Sh283.3 billion), and it expects a $750 million (Sh77.3 billion) syndicated loan will come through by the end of this month. The Government has also tapped two loan agreements with China worth $3.6 billion, Standard & Poor’s said.

The Government wants to borrow more abroad and reduce debt issuances on local markets, where rates are rising. The yield on the government’s benchmark 91-day Treasury bills rose to more than 21 per cent at an auction this week, the highest since at least 1998.

“In view of the high interest rates, we now want to substitute domestic borrowing with external debt,” Rotich said.

“That will help ease pressures so that it does not affect economic growth.”

The syndicated loan would help boost liquidity in the foreign-exchange market when the money comes through in about two weeks, Rotich said.

The ratings agency on Friday revised its budget deficit forecast to 9.4 per cent of GDP for 2014-15, from a previous estimate of 7.3 per cent in April. While much of that increased financing burden is related to spending to accelerate construction of a new railway, the “structural deficit” also remains high, Standard & Poor’s said.

The Central Bank has increased its benchmark interest rate by 300 basis points this year to support the shilling and the resulting rise in interest rates has made government borrowing on the local markets more costly. The 91-day Treasury bill yield is at a 17-year high.

The cost of external debt is also climbing and “we expect higher interest costs will further pressure Kenya’s public finances,” the ratings agency said.

The country’s credit rating outlook was lowered to negative from stable because of elevated risks from currency depreciation and a widening budget deficit, Standard & Poor’s said.

The country’s rating was affirmed at B+, four levels below investment grade, the New York-based firm said in a statement. The drop in rating comes even as Government announced that it will cut on its budgetary spending to address liquidity crunch.

National Treasury Cabinet Secretary Henry Rotich on Monday announced the Government is re-evaluating the 2015/2016 financial plan to identify non-priority areas and consolidate spending to more crucial areas of the economy to give strong indication of the hard economic times the country is experiencing.

“The negative outlook reflects our opinion that Kenya’s low fiscal position is structurally weakening and that this will feed into a mounting debt stock, which could also increase external vulnerabilities,” Standard and Poor said in the statement.

The change in outlook follows a similar move by Fitch Ratings in July. Kenya, the world’s largest exporter of black tea and the biggest economy in East Africa, is facing a number of challenges including attacks by Islamist militants that have scared off tourists and changing weather patterns, which have affected farming output.

Kenya’s government and the World Bank both reduced their growth forecasts for the $55 billion economy last week. The Washington-based lender projects expansion of 5.4 per cent this year, compared with an estimate of six per cent in December, while the Treasury is more optimistic, predicting six per cent growth, down from a projection of 6.5 percent previously.

Kenya’s debt is equivalent to 45 per cent of its gross domestic product, a figure that could swell to 60 per cent by the fiscal year through June 2017, said Standard & Poor’s.

The country sold an inaugural Eurobond last year, raising a total of $2.75 billion (Sh283.3 billion), and it expects a $750 million (Sh77.3 billion) syndicated loan will come through by the end of this month. The Government has also tapped two loan agreements with China worth $3.6 billion, Standard & Poor’s said.

The Government wants to borrow more abroad and reduce debt issuances on local markets, where rates are rising. The yield on the government’s benchmark 91-day Treasury bills rose to more than 21 per cent at an auction this week, the highest since at least 1998.

“In view of the high interest rates, we now want to substitute domestic borrowing with external debt,” Rotich said.

“That will help ease pressures so that it does not affect economic growth.”

The syndicated loan would help boost liquidity in the foreign-exchange market when the money comes through in about two weeks, Rotich said.

The ratings agency on Friday revised its budget deficit forecast to 9.4 per cent of GDP for 2014-15, from a previous estimate of 7.3 per cent in April. While much of that increased financing burden is related to spending to accelerate construction of a new railway, the “structural deficit” also remains high, Standard & Poor’s said.

The Central Bank has increased its benchmark interest rate by 300 basis points this year to support the shilling and the resulting rise in interest rates has made government borrowing on the local markets more costly. The 91-day Treasury bill yield is at a 17-year high.

The cost of external debt is also climbing and “we expect higher interest costs will further pressure Kenya’s public finances,” the ratings agency said.