Kenya: Moody's Cautions Kenya Debt Pile-Up Bad for Rating

Kenya's credit rating would come under downward pressure if it hit the maximum public debt level of 74 per cent of the gross domestic product (GDP), a Moody's analyst says.

The gross public guaranteed debt level amounts to 58 per cent of the nominal GDP, meaning it is only Ksh1.38 trillion ($13.7million) away from the Ksh6.55 trillion ($66 million) level that would trigger a major concern on rating.

A lower rating would cause the country to borrow at higher interest rates.

As at the end of last month, the estimated public debt stood at Ksh5.166 trillion ($50 milllion), although this amount did not include any external debt that could have been incurred in both July and August whose data is not yet available.

The 74 per cent public debt-to-GDP ratio is the level specified in the debt management strategy paper that is passed or approved by Parliament as one of the annual budget documents.

"While the 74 per cent debt to GDP ceiling is well above the Treasury's current level and so provides some shock absorption capacity to the fiscal authorities, if actual debt reaches this level it would put downward pressure on the rating," said Lucie Villa, vice president and sovereign analyst for Kenya in response to our queries.

The maximum public debt level is set by Parliament as part of a debt management framework which is formulated by the Treasury every three years.

The Treasury has traditionally desired (in fiscal policy projections) to keep debt at below 50 per cent but has found this difficult in recent years in the face of mega projects and limited revenue generation locally.

"We understand that the 74 per cent debt-to-GDP ceiling in Kenya is not a fiscal policy anchor, but it's more Parliament approving the Treasury's borrowing up to a certain limit," noted Ms Villa.

Due to the huge public liabilities, debt servicing and the wage bill are the two largest items on the recurrent expenditure to the extent that development expenditure has fallen below the officially desired minimum of 30 per cent.

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