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Kenya’s increasingly vulnerable credit profile

By Morris Kiruga, in Nairobi
Posted on Wednesday, 24 July 2019 19:19

Spending on the standard gauge railway is one of the reasons for Kenya's high debt levels. REUTERS/Thomas Mukoya

Kenya is working towards reducing government debt through fiscal consolidation, and a eurobond issuance, allowing it space to deal with growing liquidity problems, according to credit ratings agency Moody’s.

The East African country wants to roll out new roads, railways and other massive infrastructure projects to grow its economy, drive business and curb unemployment. It needs to raise $4bn per year.

  • Kenya issued a $2.1bn eurobond in May to plug its budget deficit and refinance a previous eurobond.
  • This raises the country’s reliance on external debt at the expense of cheaper concessional funding, resulting in a heavier repayment schedule from 2024.

“Domestic liquidity pressures in Kenya are intensifying, but yields remain stable for now,” said Lucie Villa, Moody’s analyst and the report’s co-author.

  • Foreign-interest payments currently account for 5.8% of government revenue, up from around 1% (2011-2012).

Kenya’s debt burden is expected to stabilise just below 60% of GDP in the medium term, according to Moody’s.

Rate cap

Nearly two years ago, Kenya put a cap on loan interest rates, drastically shrinking credit to the private sector. This resulted in banks purchasing more government debt.

  • Government debt has grown to 30% of commercial bank assets.
  • Kenya’s commercial debt rose to 34.4% of total external debt, up from 6.4% (2013).

Treasury wants to repeal the interest cap, hoping to convince parliament that this is damaging growth. While it may reduce the high risk of default, allowing banks to give bigger loans to the private sector, removing the cap would also intensify the government’s liquidity problems.

“Kenya’s credit profile is increasingly vulnerable to any deterioration in the banking sector or adverse market sentiment,” said Villa

Late payments

The Kenyan government is also hurting local business by delaying payment to a rising number of service providers.

  • Kenya’s arrears to domestic goods and services providers rose to 1.6% of GDP (2018) from 0.9% (2016).
  • Ahead of the 2019 budget speech, President Uhuru Kenyatta promised to pay providers by the end of June.
  • Government’s arrears to domestic suppliers have resulted in more non-performing loans (NPLs). Kenyan banks have seen NPLs double in the past three years, climbing to nearly 13% of gross loans, according to the Moody’s report.

Kenya is also facing major revenue collections gaps that are likely to widen to 2% by 2021.

A view on East Africa

Kenya’s recent economic growth is among the success stories in East Africa. Moody’s also reviewed the 2019/2020 budgets of five East African countries, noting:

  • Ethiopia’s deficit is expected to widen moderately while the country is facing low revenue generation.
  • Tanzania is working towards broadening its tax base and increasing spending to support an ambitious economic development agenda.
  • “In the next two years, we expect that fiscal deficits will be below those necessary to stabilise debt in all East African countries except for Uganda, where the debt burden is expected to rise, compared to declining or broadly stable debt burdens in the rest of the region,” said Villa.

Bottom line: Kenya’s growth is becoming increasingly difficult without access to cheap money. The government is hoping to woo investors with promises of easy credit and business-friendly laws to stimulate the economy.

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