This report does not constitute a rating action.
DUBAI (S&P Global Ratings) June 27, 2024--S&P Global Ratings said today that Kenya's fiscal targets are unlikely to be achieved against a backdrop of mounting societal pressure to repeal the Finance Bill. In line with our existing base case, we anticipate the administration will now become more cautious about taxing the economy, given the high cost of living and the population's concerns around it. We have therefore maintained our fiscal deficit projections at about 5% of GDP in the fiscal year ending June 30, 2025 (fiscal 2025), compared with 3.3% under the budget, factoring in continued revenue underperformance and the still-elevated cost of domestic financing.
Youth-led protests have broken out across Kenya to demonstrate against $2.3 billion of new tax measures in the Finance Bill. To appease demonstrators, Parliament passed amendments to the bill that drop contentious measures including taxes on bread, cooking oil, car ownership, and sanitary items. Following the widespread protests, President William Ruto declined to sign the bill into law and has 14 days to propose additional amendments to Parliament. Our base-case assumes the bill will likely be passed with significant further tax concessions that will necessitate expenditure cuts captured in future supplementary budgets.
Amendments to the Finance Bill reinforce our existing expectation of fiscal slippage versus the government's fiscal 2025 budgetary targets. Kenya's revenue mobilization forecasts have historically fallen short of budget, reflecting structural weaknesses in tax revenue collection and administration, tax exemptions, and a large informal economy (estimates pin the tax compliance rate at about 60%). We project that ongoing revenue shortfalls and higher-than-budgeted domestic debt-servicing costs will keep fiscal deficits wide at 5% of GDP in fiscal 2025, compared with 5.6% in fiscal 2024. Another impediment to deficit reduction is the need to repay arrears of about 4.4% of GDP including payments to contractors, suppliers, and pensioners.
We expect revenue shortfalls will be plugged through additional domestic financing. The original Finance Bill forecast a reduction in the net domestic borrowing requirement to 1.5% of GDP in fiscal 2025, from 2.5% in fiscal 2024. We anticipate wider fiscal deficits will require additional domestic issuance, resulting in a slower and more gradual decline in domestic yields. This will continue to pressure Kenya's interest bill, which climbed to about 30% of general government revenue in fiscal 2024, the fifth-highest of all rated sovereigns globally. Banks' exposure to the government also remains elevated at 21% of total assets at end-2023, crowding-out private sector lending.
Kenya's disbursement under the IMF's seventh review hinges on credible fiscal consolidation. While a staff-level agreement was reached in early June, IMF board approval under the seventh review will remain subject to implementing corrective measures to reverse fiscal slippage. We anticipate the IMF may work with the authorities to recalibrate select program targets, allowing for a more gradual path to fiscal consolidation. We understand the upcoming tranche will be less than originally planned, as the total ECF-EFF program was downsized by $290 million on account of restored capital market access.
Notwithstanding fiscal pressures, Kenya's immediate external liquidity risks have receded. On Feb. 17, 2024, Kenya successfully tapped global capital markets by issuing a $1.5 billion Eurobond at a yield of 10.375% to partially buyback its $2 billion Eurobond that matured on June 24, 2024 (the remaining $500 million was settled using part of the $1.2 billion World Bank allocation). In the same month, Kenya raised $1.58 billion through the oversubscription of an eight-year tax-free domestic infrastructure bond at 18.5%. These issuances helped spur a rapid appreciation of the currency, which improves Kenya's baseline medium-term debt trajectory.
Our next scheduled publication on Kenya is on Aug. 23, 2024. The foreign currency rating remains at 'B' with a negative outlook.
Related Research
- Kenya's Debt Conundrum: What Is The Path Forward? April 16, 2024
- Banking Industry Country Risk Assessment: Kenya, April 11, 2024
- Kenya, Feb. 26, 2024
- Kenya 'B' Rating Affirmed After Debt Repurchase Offer; Outlook Remains Negative; Proposed Eurobond Issue Rated 'B', Feb. 9, 2024
- African Domestic Debt: Reassessing Vulnerabilities Amid Higher-For-Longer Interest Rates, Nov. 1, 2023
| Primary Credit Analyst: | Giulia Filocca, Dubai + 44-20-7176-0614; giulia.filocca@spglobal.com |
| Secondary Contacts: | Ravi Bhatia, London + 44 20 7176 7113; ravi.bhatia@spglobal.com |
| Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com | |
| Additional Contact: | Sovereign and IPF EMEA; SOVIPF@spglobal.com |
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