International Monetary Fund
Lucie Villa
Sh560 billion

Moody’s predicts deficit will hit 6.5pc of the GDP

Kenya’s fiscal deficit is likely to exceed the 5.7 per cent target of the gross domestic product (GDP) this year, piling an extra Sh78 billions of borrowing or forced budget cuts on top of the current numbers.

Credit rating agency Moody’s projects the fiscal deficit will amount to 6.5 per cent of the GDP (equivalent to Sh638 billion) compared to Treasury’s initial projection of 5.7 percent, which is equal to Sh560 billion. Any new debt sourced overseas to meet the deficit would also likely attract higher interest rate due to the rising global rates, Moody’s said.

Even at 6.5 percent of the GDP, this would still be a narrowing of the deficit from June 2018’s 7.1 per cent fiscal deficit, Moody’s noted. “Moody’s expects only a gradual narrowing of the fiscal deficit to around 6.5 per cent of GDP in fiscal 2019, which is higher than the government’s target of 5.7 per cent in the original budget,” said Moody’s report dated December 11. However, exceeding the target would be against the expectation of the International Monetary Fund (IMF) which set 5.7 per cent as the targeted deficit for the year ending next June. Moody’s notes the total public debt would also likely hit 60 per cent of the GDP in the medium term, which in Kenyan budgeting context means a period of up to three years. Currently the debt stands at about 57 per cent.

“The government debt burden has increased consistently and we expect it to reach 60 per cent of GDP over the medium-term,” said Lucie Villa, a Moody’s vice president who is also the senior credit officer and co-author of the annual report. “Under our central scenario, there will be a gradual reduction in the primary deficit and robust nominal growth that will partly compensate higher interest payments.”

Moody’s is projecting interest rates charged on any new loans taken overseas are bound to be higher than those on current borrowings.

“Kenya’s twin deficits (fiscal and current account) expose it to tighter global liquidity, which makes interest rate rises more likely, a risk the government is particularly sensitive to given its large borrowing requirements.”

Recently, Kenya’s Eurobond yields have risen following the lukewarm relations with the IMF and the fund managers’ exit from emerging and frontier markets in the midst of rising interest rates in the US.

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