Emerging

Relatively spared from the crisis but weakened

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Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
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5
KENYA  
RELATIVELY SPARED FROM THE CRISIS BUT WEAKENED  
Although Kenya was spared a recession in 2020, the Covid-19 shock exacerbated the country’s economic vulnerabi-  
lities. The risk of excessive public debt is especially high, and despite financial support provided by multilateral and  
bilateral creditors, budget management will remain a big challenge in the short and medium terms. The level and  
structure of the debt expose the government to solvency risk. Fortunately, reforms are expected to reduce this risk,  
and the IMF financing programme recently granted to the Kenyan authorities should support these efforts and help  
reassure non-resident investors.  
A DYNAMIC BUT UNCERTAIN RECOVERY  
FORECASTS  
Although Kenya was spared a recession in 2020, the pandemic had  
a significant impact on the economy, which is largely driven by the  
2
019  
2020e  
2021e  
2022e  
services sector. At the height of the crisis in Q2 2020, GDP contracted  
nearly 6% year-on-year. The Central Bank of Kenya (CBK) cut its key  
rate on two occasions, lowering it by a total of 125 basis points to 7%.  
In addition to fiscal support measures (estimated at 0.5% of GDP), other  
measures were taken to inject liquidity, including a 100bp reduction in  
the reserve requirement ratio to minimise the impact of the shock and  
allow the exchange rate to act as an adjustment variable. All in all,  
full-year 2020 GDP growth is estimated to near zero.  
Real GDP growth (%)  
5.4  
5.2  
-0.1  
5.3  
7.6  
5.0  
5.7  
5.0  
Inflation (CPI, year average, %)  
Cent. Gov. balance / GDP (%)  
Cent. Gov. debt / GDP (%)  
-7.7  
62.1  
-5.8  
46.8  
9.5  
-8.4  
68.7  
-4.8  
47.2  
8.9  
-8.1  
71.5  
-5.3  
45.9  
7.2  
-6.7  
72.9  
-5.4  
45.0  
7.9  
Current account balance / GDP (%)  
External debt / GDP (%)  
Forex reserves (USD bn)  
The rebound in GDP growth is expected to continue in 2021 with a full-  
year growth of nearly 5%. Yet the current environment is still marred  
by a high level of uncertainty. This is mainly due to the high risk of  
a new wave of contaminations and further restrictions on business.  
In early March, the Kenyan authorities implemented new preventive  
measures and restrictions to combat a surge in new Covid-19 cases.  
The prospects of recovery will continue to hinge on the spread of  
the pandemic and the rollout of a vaccination campaign. To date, the  
country has received nearly a million doses of the AstraZeneca vaccine  
Forex reserves, in months of imports  
6.1  
4.9  
4.2  
4.6  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
UNPRECENTED CONTRACTION OF THE ECONOMIC ACTIVITY  
GDP Growth  
Variation, %  
Inflation, average CPI  
Interest rate (RHS)  
Policy rate, %  
1
as part of the Covax initiative . The authorities’ goal is to vaccinate half  
of the population by mid-2023.  
1
2
8
6
4
2
0
2
4
6
In January, the IMF granted Kenya a financing programme to help  
support the recovery phase, with funding of USD 2.4 bn over three  
years. The programme will support fiscal consolidation efforts in  
particular, to help the Kenyan government contain the growing risk of  
excessive debt.  
10  
8
6
4
2
0
-
-
-
2
4
6
-
-
-
THE FISCAL DEFICIT AND PUBLIC DEBT ARE MORE VULNE-  
RABLE  
-8  
Q1  
Q3  
Q1  
Q3  
Q1  
Q3  
Q1  
Q3  
Q1  
Q3  
Q1  
Q3  
Already hit structurally by budget mismanagement, the fiscal deficit  
swelled last year in the midst of the crisis (to 8.5% of GDP in 2020,  
compared to a 2015-2019 average of 7.9% of GDP). The accumulation  
of deficits has driven up the public debt, which increased even more as  
the fiscal pressure intensified due to crisis management: the revenue  
collected in fiscal year 2019/20 fell far short of forecasts, while  
expenditures were much higher than expected. The public debt has  
now swelled to nearly 70% of GDP (+15% in nominal value compared to  
2
016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021f 2021f  
CHART 1  
SOURCE: CENTRAL BANK, BNP PARIBAS  
very structure implies a considerable cost. Interest on the external debt  
has doubled since 2015 due to the reduction in the share of concessional  
loans (they now account for less than a quarter of Kenya’s debt). The  
government has had to face up to the sharp drop in fiscal and export  
revenue over the past year, which has sharply undermined its debt  
servicing capacity. The government is also exposed to currency risk  
because half of debt outstanding is denominated in foreign currency  
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019), the critical threshold defined by the IMF to indicate a high risk  
of excessive debt.  
Already present before the crisis, this excessive debt risk is now a major  
source of vulnerability. Attesting to this situation, S&P downgraded the  
country’s sovereign rating from B+ to B in early March 2021. Moreover,  
with more than a third of the debt comprised of commercial loans, its  
(
67% in USD). In 2020, the Kenyan shilling depreciated by 10% against  
the US dollar.  
1
This initiative of the UN and its partner countries aims to guarantee that all countries have equitable access to safe and effective vaccines.  
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Eco Emerging // 2 quarter 2021  
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6
TEMPORARY SUPPORT MEASURES  
RISING PUBLIC DEBT LEVEL AND BURDEN  
To address this situation, the country has benefited from a debt  
servicing moratorium with the Paris Club of international creditors.  
Initially reluctant to join the Debt Service Suspension Initiative (DSSI),  
fearing it would send a negative signal to bond investors and reduce  
its access to the market, Kenya was finally granted a 6-month holiday  
on debt payments by the Paris Club between January and June 2021,  
saving the country about USD 300 million. Debt payments to Chinese  
creditors were also suspended over this same period, representing  
savings of about USD 345 million. These amounts will have to be paid  
back over a 5-year period starting in 2023. The Kenyan government  
has pledged to continue honouring the amounts due to its multilateral  
creditors.  
%
income  
External public debt service  
Domestic public debt service  
Public debt (RHS)  
% GDP  
45  
80  
70  
4
0
5
0
5
0
5
3
3
2
2
1
6
5
0
0
40  
3
2
0
0
10  
5
10  
0
All in all, the financial relief is both limited and temporary. It will ease  
the liquidity squeeze and will enable the funds to be reallocated to  
support the recovery, but it does not resolve the structural problem  
of debt sustainability. The amount saved (USD 545 million) accounts  
for only 20% of overall servicing of its external public debt in 2021.  
Moreover, the amounts at stake are rather small compared to the  
country’s overall external financing needs, which are equivalent to  
about 6% of GDP in 2021 (USD 6.7 bn). Debt servicing will still account  
for about 27% of exports, exceeding the IMF’s indicative prudential  
threshold of 23%.  
0
2
014/15 2015/16 2016/17 2017/18 2018/19 2019/20f 2020/21f 2021/22f  
CHART 2  
SOURCE: NATIONAL TREASURY, CENTRAL BANK, BNP PARIBAS  
The Building Bridge Initiative (BBI) has major implications for the next  
elections because it aims to redefine the government’s structure. The  
initiative is still being debated in Parliament, because both its content  
and form are controversial at a time when gatherings are banned and  
the organisation of the referendum will be very costly.  
Alongside these measures, Kenya reached an agreement with the IMF  
for a 38-month, USD 2.4 bn financing programme subject to a quarterly  
review. The funding should be used in principle to support recovery  
efforts, streamline expenditures, and broaden the tax base. These  
reforms are necessary to ensure debt sustainability in the medium  
term and to contain the related risks, which are straining the local Non-resident investors have managed to look beyond the political risks  
bank system. Already strapped with a high doubtful debt ratio (14.14% in recent years, and Kenya’s attractiveness could be preserved under  
in December 2020, 2.1 percentage points higher than in December these circumstances. Foreign investors are still necessary as a source  
2
019), the banking system is largely exposed to sovereign risk, and of financing and new source of growth. The private bond market’s  
to the solvency risk of parastatal or state-owned companies: nearly a resilience in recent months relative to the regional market illustrates  
third of all banking sector loans are comprised of public debt. This also the persistent attractiveness of Kenya’s economy. The sovereign bond  
creates a crowding out effect for private sector lending.  
issue expected later this year will set the tone. Seen in this light, the  
new IMF financing programme is a positive factor.  
THE POLITICAL CALENDAR COULD DELAY FISCAL  
CONSOLIDATION  
Completed on 9 April 2021  
Measures to improve public finance management will remain the  
focus of attention in the months ahead. The government has said it  
is determined to favour borrowing from multilateral and bilateral  
creditors, which allows it to lock in more favourable interest rates.  
Perrine GUÉRIN  
perrine.guerin@bnpparibas.com  
Depending on the amounts obtained through official creditors, the  
Treasury of Kenya also intends to raise funds in the international bond  
market this year. The bond issue will be used to pre-finance future debt  
payments at a time when interest rates are still relatively attractive,  
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but susceptible to deteriorate . At mid-March, the Kenyan 10-year  
government bonds yield was 12.8%, up from 12.7% in mid-March 2019.  
The political calendar suggests that these fiscal consolidation efforts  
could be postponed and limited in scope. With a constitutional  
referendum scheduled for June 2021 and general elections to be held  
in 2022, there is reason to doubt that the government will be able to  
concentrate on measures to clean up public finances in the months  
ahead.  
2
Expectations of rising inflation and higher interest rates in the advanced countries (notably the US) have a negative impact on the attractiveness of emerging market bonds for inves-  
tors: it reverses the yield/risk ratio.  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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