Moody’s Investors Service, on Thursday changed the outlook on the Government of Kenya’s ratings to negative from stable. Concurrently, Moody’s has affirmed Kenya’s B2 issuer and senior unsecured ratings.

The negative outlook reflects the rising financing risks posed by Kenya’s large gross borrowing requirements, which include amortization of external bilateral debt and the need to refinance a large stock of short-term domestic debt, at a time when the fiscal outlook is deteriorating due to the erosion of the revenue base and a debt structure that exposes Kenya’s fiscal metrics to exchange rate and interest rate shocks.

Moody’s said the rapid and widening spread of the coronavirus outbreak is creating a severe and extensive credit shock across many regions and markets. Weaker growth and larger fiscal deficits will further aggravate Kenya’s already high debt and interest burdens, therefore creating necessities for the decision to affirm the B2 rating balances those pressures against fundamental economic strengths including a relatively large and diversified economy with high growth potential, and quite deep domestic financial markets.

The B2 rating reflects Moody’s expectation that Kenya will not participate in any debt relief initiative that requires the participation of private sector creditors, which could carry further negative implications for the country’s rating, and more generally that Kenya will meet all its debt service commitments to private sector creditors.

Kenya’s long-term foreign-currency bond ceiling and long-term foreign-currency deposit ceilings remain unchanged at Ba3 and B3, respectively. The Ba2 long-term local-currency bond and deposit ceilings remain unchanged as well.

Although Kenya does not have any large principal payments due in the near term — the next Eurobond principal payment is in 2024 — the country is at the start of a more difficult external amortization schedule. In each of the next three years, Kenya will need to repay on average 1.7% of GDP in external principal amortizations, in addition to any potential external financing of the fiscal deficit. This more challenging external amortization schedule coincides with a tightening of external financial conditions as a result of the coronavirus outbreak.

The removal of the lending rate cap in November 2019 has increased the sensitivity of market yields to the government’s domestic borrowing requirements. Nevertheless, access to a relatively deep domestic financial market somewhat mitigates the immediate financing risk from the tightening in external market conditions.

Moody’s expects that the government will rely on concessional multilateral financing for much of its additional borrowing requirements in fiscal year 2019/20 and fiscal year 2020/21, with the remainder covered through increased domestic borrowing. It is possible that the government may also seek other forms of relief, possibly including on loans from Chinese state-owned banks.

Moody’s does not currently expect Kenya to participate in any debt relief initiative that would require the participation of private sector creditors. A decision to do so could carry negative implications for the country’s rating. More generally, delays or changes in debt service payments owed to private sector creditors compared to the original terms of the contract could be negative for the sovereign’s rating.