Moody’s Investors Service has placed the B1 long-term issuer rating of the government of Kenya on review for downgrade.

Persistent high primary deficit & high borrowing costs. Debt. Debt. Plus GoK Liquidity pressures. Political risk just means no attention 👆👆 https://t.co/n9iEwliJJZ

— Mohamed Wehliye (@WehliyeMohamed) October 3, 2017

Excerpts

The decision to place the rating on review for downgrade was prompted by the following key drivers:

•  Persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness higher
• Government liquidity pressures risk rising in the face of increasingly large financing needs
• Uncertainties weigh over the future direction of economic and fiscal policy, in part due to evolving political dynamics

Moody’s expects that Kenya’s government debt burden, which has risen to 56.4% of GDP in June 2017, up from 40.5% five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60% mark by June 2018.

Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0% of its revenues on interest payments, up from 10.7% five years ago.

A key focus of the review will be to assess the capacity and willingness of the government to address these budgetary challenges in a comprehensive, effective and timely manner.

2. Downgrade at a time when we are using debt to pay off debt is a nightmare scenario. Investors charge more. We borrow more. Tipping point

— Mohamed Wehliye (@WehliyeMohamed) October 3, 2017

What Next?

Moody’s would downgrade the rating if the review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.

Or

Moody’s would confirm the rating at B1 if the review were to conclude that the policy response offers the prospect for tempering the currently-anticipated upward trend in government debt and that liquidity risks are being effectively managed.