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Mixed bag for Kenya’s credit risk

People Daily Reporter @PeopleDailyKE

As Kenya prepares to issue another Eurobond this quarter, credit rating agencies have issued varied assessments of the country’s debt stress level. Yesterday, Moody’s downgraded the country’s credit score from B1 to B2 and assigned the country a stable outlook. In statement, Moody said the decision was informed by “a rise in debt levels and deterioration in debt affordability”.

Moody’s forecasts government debt to increase to 61 per cent of the Gross Domestic Product (GDP) in the 2018/19 financial year, from 56 per cent of GDP in 2016/17 and 41 per cent of GDP in 2011/12.

“Large infrastructure-related development spending needs combined with subdued revenue collection and a rising cost of debt will result in large fiscal deficits and keep government debt on an upward trend,” Moody’s said.

The Moody’s report added: “At B2, risks are balanced, and supportive of a stable outlook. Kenya retains strong fundamental economic strengths with a relatively diversified economy that holds strong growth potential. On Tuesday, Standard & Poor’s (S&P) ratings assigned the proposed Eurobond ‘B+’ issue. The ‘B+’ rating means that the issuer currently has the capacity to meet its financial commitments.

S&P uses multiple letters, and pluses or minuses, to indicate. The best is ‘AAA’. That means it is highly likely that the borrower will repay its debt. The worst is ‘D,’ which means the issuer has already defaulted.

When Fitch released its report last Friday, the agency revised Kenya’s outlook on long-term foreign and local debt to stable from negative and affirmed a B+ score giving the country a boast ahead of planned Eurobond road shows.

Fitch revision indicated public debt to gross domestic product would stabilise this year after a period of uncertainty occasioned by volatile polls and budget deficit shocks. The agency expects debt to GDP to increase slightly to 59 per cent and then stabilise while fiscal deficit is expected to narrow to 7.5 per cent of GDP in 2018 from 8.9 per cent in 2017.

A low debt-to-GDP ratio means an economy can produce and sell goods and services sufficient to pay back debt without falling back on further debt. Credit ratings are opinions about credit risk and are considered as a financial indicator to potential investors of debt securities such as bonds.

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