The Standard Chartered Bank chief economist for Africa and Middle East, Razia Khan, see Kenya’s debt sustainability position as comfortable, provided key reforms are front-loaded.
Khan said Kenya could still turn to its domestic market, even as global financial conditions tighten.
The remarks come at a time when analysts have warned over the country’s mounting debt service, with Treasury putting Kenya’s debt redemption in the financial year ending June at nearly Sh1 trillion.
Growth is currently supported by a rebound in agriculture, strong
remittance growth and tourism-related inflows.
The need for a faster pace of fiscal consolidation going forward will mean that some recent drivers of growth momentum may be withdrawn. Room for significant increases in public investment is limited by future public expenditure restraint, meaning that more growth-supportive reforms will be needed.
Only a strong acceleration in investment can sustain growth. The private
sector will increasingly have to do some of the heavy lifting. To this
end, the loan rate cap, which has inhibited private-sector lending
and capital formation, must still be addressed.
Kenya’s informal sector has seen considerable gains in the recent
past, helped by higher real disposable income – itself the result of a
stable shilling – and new avenues for personal unsecured borrowing.
This buoyancy may be evident in the strong pace of services growth
achieved in 2018. However, informal-sector growth does not make a robust contribution to fiscal receipts. Neither will the informal sector, on
its own, provide the solution that is required for future growth.
It is important that weak credit growth, which inhibits business credit,
is addressed as soon as possible. “Even if loan rate caps are modified
in 2019, as we expect, it will still take time for the economy to fully
regain momentum because of the lag with which credit availability feeds
into investment” said Razia Khan, Chief Economist, Africa and Middle
East at Standard Chartered Bank.
Ms. Khan has also encouraged the government to reassure the market on
debt sustainability, noting that perceptions of Kenya’s creditworthiness will determine its ability to refinance debt falling due.
“With its first Eurobond maturity in 2019 and as the initial five-year
grace period extended by the Export-Import Bank of China for the
Standard Gauge Railway ends in May, Kenya will face elevated debt
service obligations in 2019. However, we expect the country to be able
to comfortably manage its debt obligations, despite this anticipated
surge in debt service payments this year,” she said.
Kenya’s current account receipts are estimated to rise to at least USD
20bn in 2019 from USD 18bn in 2018, helped in part by continued strength in remittance and tourism growth.
External debt service on public and publicly guaranteed debt is
estimated to rise to 21.6% of revenue in 2019. With this ratio rising
more strongly, an external anchor of policy reform intent, such as the
arrangement of a new IMF precautionary financing facility, will be
“We expect fiscal reforms to focus on strengthening public financial
management and reassuring on devolution, with clarification on
counties’ ability to collect their own revenue,” said Ms. Khan.
She noted that with the conclusion of big infrastructure projects,
demand for public outlays is expected to decrease, as the ‘Big Four’
spending initiatives – housing, food security, health care and
manufacturing – will be funded via specific revenue-raising measures,
such as the recently imposed levy on gross earnings to fund affordable
MONETARY POLICY CREDIBILITY
The credibility of Kenya’s monetary policy framework, given the
anti-inflation stance of the Central Bank of Kenya, has already played a
key role in the ongoing stability of the Kenyan shilling. Expectations have been positively influenced. Ongoing Kenyan shilling stability has played an important role in helping to boost real income growth, whilst also contributing to the resilience of Kenya’s economy.