UPDATE 2 – IMF upgrades Kenya’s debt distress risk to high from moderate

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NAIROBI (Reuters) – The International Monetary Fund has upgraded Kenya’s risk of a debt crisis from moderate to high due to the impact of the coronavirus crisis, the IMF said in an assessment released on Tuesday.

The East African nation’s debt was 61.7% of GDP late last year, up from 50.2% at the end of 2015, the IMF said, driven by budget deficits caused by major infrastructure projects like a new rail line.

“The risk of a debt crisis has risen from moderate to high due to the impact of the global COVID-19 crisis, which has exacerbated existing vulnerabilities,” the fund said.

Treasury officials could not immediately be reached for comment.

However, the debt burden remained sustainable, the fund said in its debt sustainability analysis. Last week, it approved $739 million in emergency aid for Kenya to help it deal with the COVID-19 crisis.

The government has responded to the coronavirus crisis with a range of fiscal measures to limit the damage to the economy, including cuts in VAT and personal income taxes, which have worsened a number of indicators, the IMF said.

Among the sectors hardest hit by the virus crisis in Kenya are tourism and fresh produce exports, which are important sources of foreign exchange.

The present value of foreign debt to exports and the ratio of foreign debt service to exports have risen above the optimal threshold as a result, the IMF said.

“Kenya’s debt indicators will improve as exports recover after the global shock subsides,” the fund said.

There is little refinancing risk for the country’s outstanding Eurobonds once global capital markets reopen to frontier issuers, the IMF said, citing the good reception Kenya has received when it has opened up markets in the past.

He called for sustainable budgetary consolidation by the government in the medium term in order to reduce debt to a reasonable level.

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