The Kenyan economy has done really well over the last few years, and according to the government the picture is even rosier as they project the GDP to grow at 6.9% in this financial year, despite the insecurity challenges facing the country.
On the back of this accelerated projected growth rate, the cabinet approved the 2015/2016 budget that will be read in parliament, and passed, in the month of June. Of key note is that the total government expenditure has continued to grow, almost doubling over the last five years. However, revenue growth has not kept pace, growing at 59% over the same period. The only mitigation to expenditure growth far outpacing revenue growth is that a majority of expenditure is allocated towards development, which has more than doubled, while the recurrent expenditure has grown by 15% over the same period.
The faster growth in government expenses compared to revenue has led to an increase in total government debt, both domestic and external. However, despite all this, the Kenyan governments debt remains sustainable at a 43.7% Debt-GDP ratio. For Kenya, this ratio provides comfort that the debt levels are still sustainable; given emerging markets across Africa, Asia and Latin America have ratios averaging over 50%. The domestic debt has grown over time, leading to a deepening of the capital markets, as the central bank continues to issue longer dated securities. Despite our view that the debt is sustainable, the government needs to be cautious, since the cost of financing government expenditure continues to increase, yet it will take time before we reap returns from the investment in infrastructure development.
The projected increase in government debt, coupled with the expected volatility in the shilling, all point towards the rates remaining sticky with a possible risk of an increase in the short term. The projection of increased foreign debt also, despite providing short-term support to the shilling, opens the country to external global economic shocks.
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