The Business Daily spoke to David Rogovic, Vice President and Senior Credit Officer at global ratings agency Moody’s on the shape of Kenya’s macros amid the shock resulting from the US-Israel war on Iran.
Moody’s upgraded Kenya’s credit rating from “Caa1” to “B3” with a stable outlook in January, noting that the country’s near-term risk of default had fallen. Mr Rogovic reckons that factors giving rise to the ratings upgrade have provided strong buffers against the new shock.
The biggest macro-event this year has been the US-Israel-Iran war, to what extent do you think this has weakened Kenya’s macro?
When we upgraded Kenya to “B3” with a stable outlook in January, one of the key drivers was a reduction in near-term default risk because of the increase in reserves that we’d seen over time. Partly tied to that was the government having access to the Eurobond market and taking advantage of this market accessed to issue Eurobonds, not just to help finance deficit, but also push back the next big maturities.
Since then, we’ve seen a marginal deterioration in growth outlook which is not uncommon for countries that are commodity importers. We have also seen a pickup in inflation. The fiscal deficit is marginally wider than we anticipated but the overall credit profile is still with the “B3” rating. The cumulative effect of the strong starting position has really helped Kenya to buffer this shock so far.
The international capital markets have remained open to Kenya with yields moving lower despite the raging war. Why have we not seen a deterioration?
Market yields are consistent with the improvement in the fundamentals that drove the upgrade to “B3”. There is also a sense that this shock would be temporary, at least initially when the conflict broke out.
Market access remains important for Kenya given its sizeable external financing needs and reliance on external financing needs and reliance on external sources to finance part of the fiscal deficit.
Is it opportune time for Kenya to return to the markets as we hear discussions on potentially conducting another liability management operation targeted at 2031 Eurobonds?
It’s always a trade-off between the cost of funding, the level of reserves in place and access to other sources of financing.
We have seen government act pragmatically, in terms of timing and accessing the market. When in a position where they don’t need to access the market at that time, they have used the opportunity to borrow and to refinance maturities falling in the near-term.
Kenya is finally unlocking funding from the World Bank DPO at the end of the month but discussions on a new IMF facility continue, do you see a funded facility from the fund as a necessity?
We don’t provide policy advice, rather we assess the government’s ability to repay debt. At a very basic level, an IMF programme is about the policy anchor.
We are still looking at what the medium-term fiscal trajectory is, and we have a slightly weaker fiscal trajectory than we did earlier in the year with deficits around seven percent of GDP. The IMF programme itself is secondary to the reforms and to the commitment to fiscal consolidation that we can foresee as a path forward where Kenya’s deficit narrows and where the debt stock stabilizes.
There are multiple ways to get to that point, and one is with the help of IMF. Our view on the fiscal trajectory is that it hasn’t changed too much. The deficit has widened in part because the effect of the conflict and some of the measures to support low fuel costs. Some of it is due to a slightly weaker growth outlook and higher inflation.
We continue to see fiscal slippages as spending pressures persist and revenues underperform; do you believe that Kenya has a credible fiscal consolidation process in place?
If you look at the revenue performance up through May of this year, with one month remaining in the fiscal year, there will be a shortfall relative to what’s projected. That shortfall this year is going to then create a lower base for next year.
We look at what was presented in the budget and what was passed through National Assembly, some of the measures were not approved by Parliament.
There will be spending pressures next year, being an election year. In addition, there is always unexpected spending needs, whether it’s from weather related events or to respond to commodity price or other types of shocks. We are looking to see whether the deficit will be at a level consistent with debt stabilising. The key will be what the deficit and the financing mix means for debt affordability.
June 25 was the anniversary of the Gen-Z led protests in 2024 and a reminder that the government can no longer go for aggressive tax measures. How else can fiscal consolidation be achieved?
The willingness to pursue a strategy that involves the upfront revenue-led consolidation has eased. The path forward is really a more moderate pace.
There are efforts geared at improving or enhancing tax compliance and tax collections that can help. This is going to be a much more gradual consolidation pace.
The Kenya shilling has held firm despite the evolving external shocks, where is the local currency finding this support?
I would not say whether the exchange rate is at appropriate level or not. I would look at the overall external position for Kenya. We see a current account deficit that has narrowed. We have seen inflation coming down and at one point, close to the lower end of the target range.
This is now coming back up but is being driven by external factors, not by the exchange rate, loose monetary conditions or overheating domestically. There are also strong reserves, most importantly.
