Ratings agency Moody’s has downgraded Kenya’s long-term issuer bond rating by one notch to B2 from B1 with a stable outlook.
Obligations rated B2 are considered speculative and are subject to high credit risk.
Moody’s said the key driver of its downgrade is the large primary deficits combined with worsening debt affordability and rising debt levels.
“The drivers of the downgrade relate to an erosion of fiscal metrics and rising liquidity risks that point to overall credit metrics consistent with a B2 rating….. In turn, large gross financing needs and reliance on commercial external debt will maintain government liquidity pressures. While the government aims to improve the efficiency of spending and revenues, such measures are unlikely to be effective enough to stem a weakening in fiscal trends.” It said in a note.
Despite the downgrade, Moody’s says Kenya retains strong fundamental economic strengths with a relatively diversified economy that holds strong growth potential. “Moreover, Kenya has a relatively deep capital market and mature financial sector, which affords the government some capacity to issue domestically in local currency and with longer tenors.”
Moody’s also forecasts government debt to increase to 61% of GDP in fiscal year 2018/19 (the year ending in June 2019), from 56% of GDP in FY 2016/17 and 41% of GDP in FY 2011/12. Large infrastructure-related development spending needs combined with subdued revenue collection and a rising cost of debt will result in large fiscal deficits and keep government debt on an upward trend.