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Ratings agency Moody’s comments on Kenya’s budget

PUBLISHED: Mon, 03 Apr 2017 17:14:53 GMT

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On 30 March, the government of Kenya (B1 stable) revealed its budget for fiscal 2017/18, starting July 2017. The government forecasts a 2.6 percentage point reduction in the fiscal deficit to 6.3% of GDP from around 8.9% in the current fiscal year. The decline in government capex to 7.7% of GDP from 9.8% in the current fiscal year mainly drives the fiscal adjustment. The budget’s reduction in recurrent spending (excluding interest) of about 0.5 percentage points to 11.9% of GDP and a 12.5% increase in government revenue, although only slightly exceeding the nominal growth rate (11.4%), also support fiscal consolidation. Potential expenditure overruns ahead of the general election in August, however, could limit the government’s fiscal consolidation efforts.

The planned reduction in the fiscal deficit is meaningful and by and large achievable because it relies primarily on cuts to capex, over which the government has greater discretionary control. However, at 6.3% of GDP, the fiscal deficit will remain high in fiscal 2017/18. We forecast government debt rising through fiscal 2017/18 to 57.1% of GDP by the end of June 2018, up from an estimated 56.5% in June 2017 and 54.2% in June 2016, as the government increasingly resorts to debt financing.

Admittedly, capex drives Kenya’s large fiscal deficit, as shown in Exhibit 1, which, at Kenya’s rating level, is not unusual given large infrastructure investment needs. However, with an average interest rate on debt of 6.7% and interest payments taking up to 15% of revenue, Kenya’s government debt is not cheap. Kenya’s debt-service indicators have deteriorated in recent years, reflecting an increasing shift towards non-concessional financing as well as recent spikes in domestic government bond yields. This makes it difficult to reach a balance between cost and benefits related to debt-financed government capex and is greatly dependent on the government’s capex efficiency.

The budget calls for further fiscal consolidation, of about one percentage point of GDP per annum, beyond fiscal 2017/18, signalling that the government recognizes its fiscal vulnerabilities and the risk of building an unsustainable debt trend. However, as currently laid out, the fiscal adjustment will be challenging to implement after fiscal 2017/18 because the government primarily relies on the rationalization of its recurrent spending and on dynamic revenues. As the IMF pointed out in its First Review of the Stand-By Arrangement in February, a fiscal consolidation targeting a deficit of 3.7% of GDP by fiscal 2018/19 (versus 5.2% under the budget) is “critical to maintain a low risk of debt distress while preserving fiscal space for development priorities.”

Kenya’s Minister of Finance, Henry Rotich, presented the budget more than two months earlier than usual to the parliament as the country prepares for general elections on 8 August. Traditionally, Kenya’s budget is read during the second week of June but as political parties are required to finish the primaries 60 days prior to the election day, the budget was tabled earlier to grant members of parliament time to weigh in.

The budget faces implementation risk in the lead up to the election. Potential election-related expenditure overruns could hinder the government’s intended 0.5 percentage points of GDP reduction in operational expenditures excluding interest. However, the government generally underperforms projected capital investment expenditure, which will likely compensate for any election-related slippage.


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