There's Reason to Worry Over Kenya's Finances, RenCap Says

(Bloomberg) -- Kenya’s budget deficit should be a worry for investors in East Africa’s biggest economy, according to Renaissance Capital’s chief economist, Charles Robertson.

The Treasury projects a funding gap of 5.9 percent of gross domestic product this financial year, compared with 7.2 percent in the previous year. That still falls short of the 3 percent target the International Monetary Fund set when it provided a precautionary credit arrangement two years ago.

“Kenya should be a country of concern for investors,” Robertson said at a conference in the capital, Nairobi. “So we need to see fiscal adjustment in Kenya as we have needed the same in Argentina.”

Kenya is not as dependent on hot money as Argentina, making it a safer investment destination than the South American economy, he said.

The government’s revenue projections are “too optimistic” and the budget deficit will likely be wider than estimated, according to RenCap’s economist for sub-Saharan Africa, Yvonne Mhango.

The Treasury expects to spend 2.47 trillion shillings ($24.5 billion) this financial year, and to receive 1.83 trillion shillings of revenue. It intends to borrow 319 billion shillings to partially fill its 596 billion-shilling budget gap.

More Borrowing

The state is reducing spending estimates this financial year by almost 2 percent after President Uhuru Kenyatta vowed austerity to improve the government’s fiscal position. While he intends to cut expenditure, he’s also promised 500,000 low-income housing units, universal health care, food security and to increase manufacturing’s contribution to 15 percent of GDP by 2022, when his second term ends.

“I would like to see Kenya borrow more to do a lot of investment to achieve manufacturing at 15 percent of GDP, but the world economy shows me they have to do a lot less of this, and raise taxes,” Robertson said.

RenCap said the Kenyan currency is overvalued and should be about 120 shillings to the dollar. It estimates the shilling will decline to 105 per dollar by the end of 2018 from 101 at present, Mhango said.

“We have seen the current account decline, which will help contain the FX reserves position and the currency,” she said.

While RenCap initially expected economic growth of 4.5 percent this year because of a cap on commercial interest rates, output has been more robust and it now estimates expansion of 5.4 percent, Mhango said. For about two years, Kenya has had a limit of 400 basis points above the prevailing central bank rate that lenders say has crimped credit, especially to risky borrowers.

While Kenya has come under IMF pressure to do away with the cap, the state wouldn’t want it gone because banks will resume private-sector lending, which would drive the government’s borrowing costs higher, Robertson said.

“With the budget deficit, we see a fiscal argument to retain the rate cap,” he said.

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