Although the Government of Kenya (B2 stable) faces intensifying liquidity pressures, its fiscal consolidation efforts and Eurobond issuance should allow it to manage these challenges, Moody’s Investors Service said in a report last month.
A reported rise in the Kenyan government’s arrears to domestic goods and service providers has started to weigh on business sentiment and has had an impact on domestic manufacturers.
At the same time, nonperforming loans (NPLs) at Kenyan banks have risen in recent years, a trend which can be indicative of accumulated arrears by the government to domestic suppliers.
“Domestic liquidity pressures in Kenya are intensifying, but yields remain stable for now,” said Lucie Villa, a Moody’s Vice President, Senior Credit Officer and the report’s co-author. “Kenya’s credit profile is increasingly vulnerable to any deterioration in the banking sector or adverse market sentiment.”
Reliance on commercial bank financing means the sovereign is highly vulnerable to adverse developments in the sector.
The issuance of a $2.1 billion Eurobond in May 2019 allowed the government to refinance a maturing $750 million Eurobond and cover some of its deficit financing for the fiscal year. However, it also increased its reliance on external commercial debt at the expense of cheaper concessional funding and its exposure to shifts in global market sentiment.
Past performance suggests the government’s efforts to increase revenue will be challenging to deliver, but Moody’s expects that the primary deficit will continue to decline progressively to 2 percent by 2021. Sustained deficit reduction is the government’s main lever to reduce its funding requirements, while lengthening the domestic debt profile remains a challenge.