Kenya’s credit rating has been downgraded to ‘B’ by Standard & Poor (S&P), due to rising fiscal and external pressures.


S&P Global Ratings is a US credit rating agency and a division of S&P Global that deals with financial research and analysis on stocks, bonds, and commodities.


“It is time for Kenya’s economic managers to decrease Government revenue to GDP ratio, lower the fiscal deficit and allow the Kenya Shilling to depreciate. Substantial revenue increases and expenditure rationalization is expected to be a difficult task ahead of the planned constitutional referendum in 2021 and a general election in 2022,” said Mark Bohlund, Senior Credit Research Analyst at REDDIntelligence.


He added that supported by the International Monetary Fund (IMF) program, the Government will attempt to widen the tax net and raise revenues as a GDP percentage. It will also likely try to address Kenya’s generous tax exemption schemes- which by some estimates amount to lost revenue of up to 6.5% of GDP.



A report by the Parliamentary Budget Office, titled Evading recessionary pressure under a mounting debt burden, warns that a continued expansionary fiscal policy given the limited fiscal space in the current state of the economy may result in budgetary unsustainability.


Suppose there is no significant change in implementing policy interventions geared towards enhancing revenue collection and reducing non-core spending. In that case, this policy think tank says then expenditure as a share of GDP is likely to go up and revenue as a share of GDP decline in the medium term.


The risk here is that increased spending when revenues are down, interest payments on public debt are rising, and the economy’s ability to incur more debt is narrowing, will render the economy vulnerable to fiscal unsustainability.



Global credit outlook

In its Global Outlook-2021-S&P, Global Ratings says the COVID-19 pandemic will continue to exert pressure on global credit conditions this year.


The rating agency said that even if a vaccine becomes widely available by the middle of 2021, the virus’s containment will remain very uneven on a global scale.


Until then, further waves of COVID-19 cases will require new containment measures, could hit weak economies and cause further credit deterioration.


This is especially in those sectors most exposed to social distancing and travel restrictions.



Impact of COVID-19 on credit conditions

S&P maintains that COVID-19 will be contained in the second half of 2021 through a combination of intense vaccination campaigns, treatment and testing, stating with more developed economies.


Countries will then lift many social-distancing measures and resume international travel, triggering a rebound in consumer demand.


At that point, governments will begin to phase out extraordinary fiscal support slowly.


Central banks worldwide are likely to keep interest rates low while offering liquidity support to the economy.


After Egypt, the three other countries within Europe Middle East and Africa(EMEA) with the highest rollover ratios during 2021 as a percentage of GDP are Kenya (26%; reflecting high short term debt as well as an overall increase in debt levels), Bahrain, and South Africa.


All three had seen rising debt to GDP even before the pandemic, excluding Lebanon, which is currently in default on its external debt.


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