Standard Chartered sees Kenya’s debt as sustainable, provided reforms are front-loaded

·        Kenya is set to embark on an ambitious medium-term fiscal consolidation path

·        Fiscal consolidation will be supported by a reform environment that seeks to enable rapid private-sector investment and growth

·        Monetary policy credibility is a key factor supporting the ongoing stability of the Kenyan shilling

Nairobi: February 11, 2019: Standard Chartered Bank economists see Kenya’s debt sustainability position as comfortable, provided key reforms are front-loaded.

Growth is currently supported by a rebound in agriculture, strong remittance growth and tourism-related inflows. Pent-up demand after a long period of election-related uncertainty in H2-2017 also helped to support 2018 growth, which likely reached c.6%. However, 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for a faster pace of fiscal consolidation going forward will mean that some recent drivers of growth momentum may be withdrawn.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: a significant rise in Kenya’s investment rate.

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.

Debt sustainability


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 important.

“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 housing.

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, along with a comfortable FX reserves position, has played an important role in helping to boost real income growth, whilst also contributing to the resilience of Kenya’s economy.