Fitch Ratings has revised Kenya’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘B’.
The revision, according to the firm reflects increased external financing constraints amid high funding requirements, including a Ksh.283 billion Eurobond (US$2 billion) maturity in 2024, weakening international reserves, rising financing costs, and uncertainty regarding the fiscal trajectory, for example, due to execution risks of the announced tax hikes amid social unrest.
“Our expectation that the global tightening cycle could maintain unfavourable market conditions into 2024 is a significant headwind for the authorities who plan to refinance the Eurobond in external markets,” said Fitch in its report.
Fitch assumes that the government will meet its financing obligations in FY24 through a combination of official lending, syndicated loans and a drawdown in reserves.
Expected external financing in FY24 includes approximately Ksh.141.9 billion (USD1.0 billion) in IMF disbursements, Ksh.269 billion (USD1.9 billion) in project loans from official creditors and continued use of syndicated loans.
The rating affirmation balances Kenya’s relatively high government debt and external indebtedness, among them narrow revenue base against the authorities’ commitment to fiscal consolidation anchored by the IMF programme and strong medium-term growth prospects.
High Debt, Currency Risk
Fitch estimates that the government debt/GDP ratio rose to 71.0 percent in FY23, up from 67.3 percent in FY22, reflecting the shilling’s 16 percent depreciation against the US dollar since end-FY22.
“Kenya’s government debt is exposed to currency risk, as half is foreign-currency denominated.”
The parliament has approved a debt-to-GDP anchor of 55% (in net present value) to replace the current nominal benchmark debt ceiling of Ksh.10 trillion.
Fitch projects Kenya’s government debt to decline to 68.5% of GDP in FY25, but it will remain well above the projected ‘B’ median of 54% in 2025.
While political risks associated with the August 2022 general election have eased, Fitch said the Kenya Kwanza administration faces heightened social pressures on the back of high cost of living.