Kenya - Deficit Will Narrow As Debt Servicing Looms Large


Saturday, March 31, 2018 /05:06 PM/BMI Research


BMI View: Kenya's budget deficit will narrow in the coming quarters after peaking in fiscal year 2016/17, as election-related spending decreases and the government begins to embark on fiscal consolidation. However, elevated levels of debt will likely lead to concern among investors in the coming years as many obligations mature.

Kenya's fiscal deficits are set to narrow in the coming years as political pressures on the government subside and concern about the debt burden triggers fiscal consolidation. Spending will likely grow at a more muted pace as public sector wage growth and implementation of government-funded development projects slow down. We expect revenues to continue growing at a steady pace in the meantime.

As such, we forecast budget deficits worth 7.5% and 6.2% of GDP in fiscal year (FY) 2017/18 and FY2018/19 respectively. This will likely provide reassurance to investors concerned about the country's growing debt burden and large amount of debt service due in the coming years. While fiscal consolidation will mean that the elevated debt ratio is set to fall eventually towards the middle of our 10-year outlook, a number of downside risks remain.

Space For Fiscal Stimulus Highly Limited

In the coming quarters, fiscal outlays are set to decelerate as the country moves past an expensive election season, and the government makes a gradual shift towards fiscal consolidation. The largest increases in spending during FY2016/17 were on development expenditures, which grew by 37.0% y-o-y. This was largely due to the government's acceleration of smaller road and bridge projects across the country in time for the poll, as well as larger projects such as the standard gauge railway between Nairobi and the Port of Mombasa (which has now been completed). Meanwhile, spending on wages and salaries expanded by 17.4% y-o-y. We expect that any increases in investment or wages will be much more muted in the coming quarters owing to reduced political pressure given the confirmation of President Uhuru Kenyatta's victory by the Supreme Court. Moreover, interest payments are likely to constitute a greater share of total expenditure in the coming years, meaning that the government will likely be forced to allocate fewer revenues to other outlays, which are unlikely to see the double-digit growth recorded in previous years. As such, we expect recurrent and development expenditures to grow by 5.3% and 8.0% respectively in FY2017/18, followed by 6.6% and 9.0% in FY2018/19.

In the meantime, we expect that revenue growth will remain relatively stable. Sources of revenue are diversified across sectors, and as the country's largest employer, we expect improving economic activity in the agricultural sector to sustain income tax collection in the coming quarters.

While the large informal economy means that tax collection is coming from a low base, efforts by the government to tighten revenue administration will likely also support stable growth in the coming quarters. Non-tax income collection from sources such as fines and fees will also remain robust owing to the government's increasing implementation of such measures. As such, we expect revenue to grow by 15.0% and 13.0% in FY2017/18 and FY2018/19 respectively.

Front-Loaded Debt Maturities Will Exacerbate Fiscal Pressures

Pressure on the government to service debts will likely see investor sentiment wobble over the coming quarters. The majority of Kenya's public debt matures across our short-term outlook to 2020 given that the government has taken on large amounts of short-term domestic debt in recent years. Public debt as a percentage of GDP reached an estimated 56.8% of GDP by June 2017, and we expect it to continue rising to 59.7% by end-2018.

Thereafter, we believe the government's efforts at fiscal consolidation begin to bear fruit and debt is set to gradually fall, moderating to 56.6% by 2022. As such, our core view is that the government will be able to service or roll over all of its obligations in the coming years.

However, risks are rising. While the majority of the debt due is denominated in Kenyan shillings, almost USD2.0bn of dollar-denominated debt is due in 2019, meaning that any decline in sentiment towards the shilling would boost foreign currency risks

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