Rate Cap Gone But Eurasia Sees Kenya IMF Facility Still Far Off
Rate Cap Gone But Eurasia Sees Kenya IMF Facility Still Far Off
A wider-than-anticipated fiscal deficit may delay renewal of an International Monetary Fund credit facility for Kenya despite the state repealing a controversial interest-rate cap, according to analysts including Eurasia Group.
President Uhuru Kenyatta Thursday signed the 2019 Finance Bill, scrapping three-year-old rules that required banks to limit interest on loans at four percentage points above the benchmark rate, which cut credit to businesses. That’s partly in line with recommendations to remove the cap and pursue fiscal consolidation that the IMF urged Kenya to do during talks for an insurance-type loan to be tapped when hit by certain economic shocks.
Resumption of the facility may be further delayed after revenue shortfalls forced Kenya to revise its 2019-20 fiscal-deficit forecast to 6.2% of gross domestic product from earlier projections of 5.9% and 5.6%.
“An agreement is now only likely by the end of next year,” the New York-based risk-analysis group said in a note Thursday, changing its estimate for a deal by the end of 2019. Previously, “we underestimated the fiscal slippages.”
Fiscal Slippage
Under conditions for a previous $1.5 billion arrangement that expired in 2018, Kenya was required to reduce its fiscal gap to about 3% of GDP by 2022. The deficit widened to 7.7% in the year through June, above a target of 6.8%.
The removal of the cap will unlock credit to businesses and consumers, but won’t grant Kenya an IMF program in the near term, according to Goldman Sachs Group Inc. “A programme hinges primarily on Kenya’s fiscal trajectory, and specifically the ability of the Kenyan authorities to commit to deeper revenue consolidation,” Goldman Sachs said in an emailed note.
The government’s decision last month to shift Kenya’s debt limit to 9 trillion shillings ($86 billion), rather than have it as a percentage of GDP, has also raised concern that the state plans to ramp up borrowing. Debt stands at almost 60% of GDP, higher than the 50% threshold.
Last year, the IMF raised its assessment of the chance of Kenya’s external debt distress to moderate from low. The Treasury cut its revenue and spending estimates for this fiscal year, and said public debt is sustainable.
Yields on Kenya’s 2024 Eurobonds are down 310 basis points this year to 5.22%, while the return on 30-year bonds has dropped 209 basis points to 7.73% by close of trading on Thursday, according to data compiled by Bloomberg.
“Until last month, Kenyatta was averse to expending precious political capital to repeal the cap,” Eurasia said. Yet given the fiscal slippage, “Kenyatta needed a quick win to show that his administration was serious about addressing IMF concerns.”
--With assistance from Paul Wallace.
To contact the reporter on this story: Helen Nyambura in Nairobi at hnyambura@bloomberg.net
To contact the editors responsible for this story: David Malingha at dmalingha@bloomberg.net, Hilton Shone
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