Kenya: Ruto to improve medium-term public finances but 2022 ratings downgrade looms

By David Whitehouse
Posted on Wednesday, 7 September 2022 09:55

Ruto may be unable to prevent a sovereign rating downgrade for Kenya this year. (AP Photo/Brian Inganga)

William Ruto’s presidency is likely to be supportive for Kenya’s public finances over the medium term, REDD Intelligence senior credit analyst Mark Bohlund writes in a note published after Kenya’s supreme court confirmed Ruto’s election victory.

The confirmation increases the chances that Kenya will stay on track with its IMF program but a sovereign credit rating downgrade is likely in coming months, Bohlund writes. In April 2020, Kenya agreed to a 38-month $2.34bn loan with the IMF which is being disbursed in tranches. The new president has pledged to reign in borrowing and increase tax revenue.

Even if Ruto sticks to his pledges, Bohlund says it may be “too little too late” in terms of preventing at least one sovereign downgrade by the end of 2022. S&P rates Kenya as B with a stable outlook, and forecasts that the budget deficit will narrow to an average of 5.7% between 2023 and 2025. Fitch currently rates Kenya’s ‘B+’ with a negative outlook.

While the new government will make some progress on fiscal consolidation, fiscal deficits will remain high as the tax revenue/GDP ratio will remain below pre-Covid-19 pandemic levels, Fitch said on 30 August. Policy uncertainty because of a divided parliament will be a risk to fiscal consolidation efforts, Fitch said.

A thin parliamentary majority will make it harder to adopt consistent policy.

  • The majority of 17 is not enough to govern reliably, according to Charles Hornsby, an author and researcher on Kenya who is chief information security officer at the UN refugee agency the UNHCR.
  • Bohlund forecasts that Kenya’s external financing requirement will rise to $8.9bn this year from $7.9bn in 2021, remaining largely unchanged in 2023 before jumping to $11.1b and $10.9bn in 2024 and 2025.

World Bank indicators

Kenya’s devolved system of governance, while contributing to political stability, contributes to the country’s debt problems. Bohlund estimates that devolution, introduced by the 2010 constitution, has added 3% of GDP to Kenya’s recurrent expenditure which has so far been debt-financed. This is “clearly not sustainable: you have to make this revenue-financed, either through centrally collected revenue or revenue raised by county governments themselves.”

Still, Bohlund says, it “can definitely be argued that Kenya has more of a liquidity issue than a solvency challenge”, and so fundamentally is in a much better position than Ghana.

Forthcoming World Bank assessments will give an indication of Ruto’s room for maneuver. The bank will release its Comprehensive Policy and Institutional Assessment (CPIA) and Worldwide Governance Indicators (WGI) ratings for Kenya this month. The CPIA is an assessment of the government’s capacity to use World Bank lending to support Sustainable Development goals. It is used to help determine debt sustainability in developing countries and how much concessional finance the World Bank and other development partners are willing to supply.

  • Over the last two decades, Kenya had had among the highest CPIA scores in sub-Saharan Africa.
  • The WGI scores, which influence the credit ratings issued by the agencies, measure accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption.
  • Kenya’s showing has been weaker in WGI ratings compared with CPIA due to political violence, including in 2007-2008.
  • The WGI ratings, Bohlund says, are likely to improve this month, provided Ruto’s confirmation by the supreme court doesn’t lead to violence.

Bottom line

Any sustained political violence in Kenya will harm the government’s future ability to borrow.

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