Kenya's credit profile is constrained by high and rising government debt and subdued revenue as a result of low institutional strength, Moody's Investors Service said in its annual report last Wednesday.
The country’s credit strengths include its relatively diversified economy, which sustains high growth and has proved resilient to shocks, as well as a sound financial sector.
“The government debt burden has increased consistently and we expect it to reach 60 per cent of GDP over the medium term. Under our central scenario, there will be a gradual reduction in the primary deficit and robust nominal growth that will partly compensate for higher interest payments," said Lucie Villa, Moody’s vice president and senior credit officer who co-authored the report.
Moody's expects Kenya's growth rate to return to its long-term average of around six per cent in the medium-term, thanks to a recovery in business and investor confidence.
Kenya's low institutional strength stems from its low ranking on the Worldwide Governance Indicators.
Fiscal policy effectiveness and credibility have weakened.
The government's high fiscal deficit and rollback on its commitment to repeal the cap on banks' lending rates introduced in September 2016 point to low fiscal policy effectiveness and credibility.
The fiscal deficit reached more than eight per cent of GDP between 2015 and 2017, driven by high spending related to infrastructure upgrades.
The general election and drought in 2017 put additional pressure on government spending during the year, while revenue remained subdued.
Moody's expects a decrease of the fiscal deficit to around 6.5 per cent of GDP in 2019, which is higher than the government's target of 5.75 per cent in the original budget and the 6.15 per cent proposed in the supplementary budget.
“Kenya's deficits expose it to tighter global liquidity, which makes interest rates rises more likely, a risk the government is particularly sensitive to given its large borrowing requirements,” Moody’s said.
The country’s moderate susceptibility to event risk primarily stems from government liquidity and political risks, while risks to the government from the country's external vulnerabilities and the banking sector remain relatively low, Moody’s added.