Bonds & Loans: What is the economic outlook for Kenya and the wider East African region over the near to medium term? What are some of the bright spots and what are the areas giving you concern – and key drivers for these?
Jermaine Leonard: In the East African countries that Fitch rates, our medium-term outlook is for robust growth. In Kenya, Rwanda and Uganda growth in the next couple of years will be driven by high levels of investment, as well as recovery in agriculture, following several seasons of drought conditions.
Bonds & Loans: What is your baseline expectation for the global economic environment?
Jermaine Leonard: Fitch’s forecast global growth of 3.3% in 2018 and 3.2% in 2019; this will be driven by tightening labour markets, contributing to higher wages and consumer spending, and expansionary macroeconomic policies in the advanced economies, with downside risks coming from rising trade tensions and political risks. In emerging economies, we see the countervailing forces of rising commodity prices balanced against tighter financing conditions.
Bonds & Loans: How do you see the current account balance being influenced by recent shifts in East Africa’s markets?
Jermaine Leonard: Over the short-term, Fitch expects that East African countries will continue to run sizable current account deficits; this reflects the high level of imported capital and services feeding into large infrastructure projects. Current account deficits will narrow as these projects are completed, but structural external deficits will remain until the level of export receipts rise.
Bonds & Loans: Are there any policy areas, macro, fiscal or monetary, that you feel need more focus from policymakers?
Jermaine Leonard: As a rating agency, Fitch does not offer opinions on where policymakers should or should not focus. However, the key ratings drivers will continue to be centred on the medium-term growth outlook and what steps policymakers are making to support private sector growth and, also, the trajectory of fiscal deficits and the sustainability of public finances.
Bonds & Loans: What do you see as some of the more significant growth drivers in East Africa currently?
Jermaine Leonard: Over the near-term, Fitch believes that government spending will be the most significant driver of growth in the East African countries that we cover. Over the medium-term, growth will be a function of the ROI on the government’s infrastructure spending and how much the business environment improves.
Bonds & Loans: How do you see recent shifts in the FX environment weighing on East Africa?
Jermaine Leonard: In the first half of 2018, we saw downward currency pressure across the Sub-Saharan African region; this is in line with currency pressures across emerging markets in response to monetary policy in the developed world. As these are small open economies with limited portfolio flows, FX rates tend to move in line with current account dynamics and our expectation is that this will return to trend, barring any new external shocks.
Bonds & Loans: What is your take on the inflation outlook? Do you see any risks on the horizon?
Jermaine Leonard: We see inflation moderating across the region and expect this trend to continue. Fitch has a generally favourable assessment of the credibility of monetary authorities in East Africa. We see the most significant risks coming from external shocks.
Bonds & Loans: Are there any major catalysts or contingencies on the horizon, which could significantly alter the outlook of East Africa?
Jermaine Leonard: A failure to bring deficits back down and stabilize debt levels would certainly have a negative impact on the outlook. Likewise, significant improvement in the business environment or in private sector credit provisioning would be a catalyst for growth.
Bonds & Loans: Is debt accumulation in East Africa currently keeping pace with employment and economic growth?
Jermaine Leonard: This is the million-dollar question and the one that will dominate the rating drivers in the coming few years. In East Africa, public sector debt levels have been rising, but remain in line with similarly-rated peers. The key question is whether the improvements made will lift growth and raise government revenues to a level that keeps the debt sustainable.