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Kenya sovereign rating downgraded to ‘B’ by S&P despite IMF deal

ECONOMYNEXT – Standard and Poor’s has downgraded Kenya’s sovereign rating to ‘B’ from ‘B+’ despite a deal with the International Monetary Fund and backed by World Bank support.

The outlook was stable at the new level.

Amid anti-Coronavirus measures economic growth was estimated to slow to 0.2 percent in 2020 from 5.4 percent and recover to 4.4 percent, S&P said.

The International Monetary Fund and Kenyan authorities expected growth to rebound to 7 percent.

“Our ratings on Kenya are constrained by the country’s low GDP per capita, high fiscal deficits and debt stocks, and its history of ethnic tensions,” Standard and Poor’s said in a March 05, statement.

“The ratings are nevertheless supported by its diversified economic base, including its large and diversified agricultural and services sectors, relative to peers, which should help cushion its economy and support a rebound.

“Kenya’s institutional framework is relatively sophisticated compared to peers, but ethnic loyalties often supersede national ones, leading to tensions, while the establishment and expansion of counties in recent years has exacerbated fiscal pressures.”

The IMF had given 739 million dollars under a Rapid Credit Facility and there was 3.8 billion dollar program underway.

The World Bank had given billion dollar loan.

“These external funds provided fiscal and balance-of-payments support but have led to a deterioration in external debt metrics,” the rating agency said.

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The budget deficit is expected to widen to 8.0 of gross domestic product in 2020 from 7.3 in 2019 and further to 8.7 percent in 2021, before falling to 7.7 percent.

The debt to GDP ratio was estimated at 65.1 percent in 2020, up from 57.5 percent in 2019 and may be around 70 percent for the next few years, S&P said.

Revenues are expected to fall to 17.3 percent of GDP from 17.7 percent before recovering to 17.5 percent in 2021.

IMF money usually goes to the central bank and is invested externally and do not generate imports or a current account deficit.

World Bank money typically goes to fund the budget and will eventually trigger imports of an equal amount (which Mercantilists refer to as a twin deficit), unless used for debt repayments or the central bank sterilizes domestic credit after buying a part of the dollars.

However in 2020 S&P expected the external current account deficit to fall to 4.6 percent of GDP from 5.8 percent. The trade deficit is expected to contract to 9.1 percent of GDP from 11.2 percent.

When services receipts such as tourism or external budget financing or foreign direct investment fall, the trade deficit will also fall subject to any central bank liquidity injections. FDI estimated to have fallen to 0.4 percent of GDP in 2020 from 1.2 percent a year earlier. (Colombo/Mar07/2021 – corrected B+ to B)

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