Global Ratings agency Fitch has downgraded Kenya’s foreign currency debt issuer rating to B from B+ making it even harder for Kenya to access funding from foreign investors.

“The downgrade reflects Kenya’s persistent twin fiscal and external deficits, relatively high debt, and deteriorating external liquidity, and high external financing costs, which presently constrain access to international capital markets, ‘’ Fitch said in a statement.

Fitch said the government faces elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion Eurobond in June 2024, which combined with high current account deficits, will lead to sustained pressure on international reserves.

The ratings agency also said the Stable Outlook reflects some progress with fiscal consolidation, which is supported by a USD2.3 billion IMF programme, manageable near-term debt commitments and strong post-pandemic growth that is likely to continue over the medium term.

Current account

The successive shocks of the coronavirus pandemic and the Russia-Ukraine war have contributed to a widening current account deficit and lower international reserves. Fitch forecasts the current account deficit to grow to 5.9 percent of gross domestic product (GDP) in 2022 and to remain at broadly the same levels in 2023 and 2024.

As a result, the international reserves position has fallen to $7.2 billion as of November 2022, down from $9.5 billion at the end of 2021. Despite IMF and other official disbursements, we forecast reserves to remain under pressure reaching $7.4 billion at end-2023.

It would constitute a fall to three months of current external payments at end-2023, down from 4.8 months of CXP at end-2021.  “Exchange rate flexibility has helped absorb some of the external pressure, but foreign-currency liquidity has tightened as a result and currency depreciation has increased Kenya’s external interest servicing in shilling terms,” the press statement shows.

Last week, the Central Bank of Kenya (CBK) foreign exchange reserves dropped below the statutory requirement of four months of import cover. As a result the shilling is currently trading at Sh122.7 against the US dollar compared to Sh121 in the previous months.

“The usable foreign exchange reserves remained adequate at $7,103 million (3.98 months of import cover) as at December 8. This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover,” the regulator said. “We forecast external debt service to rise to 24.8 percent of current external receipts in 2024, up from 16.6 percent in 2023, owing to the June 2024 USD2 billion Eurobond payment,” said Fitch.

“Currently, our base case assumes that the government will meet its external debt obligations of $3 billion in the fiscal year ending June 2023 (FY23) through a combination of official and commercial borrowing, which includes approximately $900 million in IMF disbursements,” the agency said.

Budget support

Kenya is expecting $750 million World Bank budget support loan, and USD300 million from the Eastern and Southern African Trade and Development Bank.

Fitch says Kenya plans an additional $600 million in syndicated loans from commercial banks. The agency is confident that Kenya will be able to meet its 2024 external debt obligations through disbursements from the IMF and other multilateral lenders, and through additional commercial borrowing.