Mwalimu-G
Elder Lister
- 24-Feb-2023 | 16:42 EST
Overview
- A challenging Eurobond issuance environment and recent tightness in domestic debt markets are raising Kenya's medium-term fiscal and external refinancing risks.
- Meanwhile, pressure in the interbank foreign exchange market has exacerbated U.S. dollar shortages and stoked currency depreciation, further inflating the stock of external debt in local currency terms.
- Our base-case scenario assumes Kenya's 2023 financing requirements are largely in place, while the new administration's commitment to reducing its net borrowing requirement via a comprehensive fiscal consolidation agenda should ease funding pressures.
- Nevertheless, risks to our base-case scenario are weighted to the downside, given Kenya's sizable external financing needs and uncertain market conditions.
- We therefore revised our outlook to negative from stable and affirmed our 'B/B' local and foreign currency ratings on Kenya.
On Feb. 24, 2023, S&P Global Ratings revised its outlook on Kenya to negative from stable. At the same time, we affirmed our 'B/B' long- and short-term foreign and local currency sovereign credit ratings on the country. The transfer and convertibility assessment remains 'B+'.
Outlook
The negative outlook reflects heightened risks to Kenya's debt servicing capacity due to constrained international market access and recent undersubscribed domestic bond issuances.
Downside scenario
We could lower the ratings over the next 12 months if Kenya's access to external funding were curtailed, resulting in external financing shortfalls or a sustained decline in foreign exchange (FX) reserves. We could also lower the ratings if we perceived Kenya's economic growth prospects or fiscal metrics had weakened significantly relative to historical norms.
Upside scenario
We could revise the outlook to stable if Kenya's external and domestic financing pressures prove to be contained with evidence of commitment to fiscal consolidation, while economic growth and institutional mechanisms remain robust.
Rationale
Constrained external financing led to Kenya suspending plans to tap international capital markets in 2022, prompting the country to draw more extensively on its FX reserves to meet its external debt repayments. Our base-case scenario assumes that Kenya will meet its financing requirements for fiscal 2023 (year ending June 30), but risks remain given relatively high foreign debt service obligations in fiscal 2024 (including a $2 billion Eurobond maturing in June 2024) against a backdrop of still-difficult issuance conditions. Recent tightness in the interbank FX market has also reduced FX liquidity and accelerated currency depreciation, driving up the cost of external interest in local currency terms.
