Johannesburg, 11 March 2020 – GCR Ratings (“GCR”) has assigned the County Government of Kisumu Issuer ratings of BB(KE) and B(KE) for the long and short term respectively, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|County Government of Kisumu||Long Term Issuer||National||BB(KE)||Stable Outlook|
|Short Term Issuer||National||B(KE)|
The ratings on the County Government of Kisumu (“Kisumu County”) reflect the deterioration in operating performance and weak audit outcomes. This is counterbalanced by the strong financial profile and government support.
The ratings recognise Kisumu’s position as an important economic center in Western Kenya, and its more diverse economy than most other Kenyan Counties, with a lower reliance on agriculture. Its Gross County Product (GCP) per capita compares favourably to the country as a whole. This notwithstanding, economic growth has fallen behind that of Kenya due to a deterioration in its industrial infrastructure and neglect of the economic potential to be derived from Lake Victoria. To spur economic growth, the County is implementing numerous projects aimed at reviving core agro-processing industries, and facilitating the necessary infrastructure to benefit from fisheries and cross lake trade. However, development efforts have been severely hampered by weak management and governance, as well as poor implementation, as highlighted in previous audit reports.
GCR views Kisumu’s operating performance as having deteriorated since FY16/17. Own source revenue (“OSR”) declined in FY17/18 and there are reports that the County was unable to meet some of its recurring costs into FY19/20. In addition, expenditure on staff costs continues to increase, as has other consumptive expenditure. As a result, the amount spent on development activity has decreased since FY16/17. Nevertheless, while the continued heavy reliance on exchequer releases remains a limitation of the rating, it does provide a reliable baseline of revenue.
Kisumu has not made use of debt funding over the review period, albeit that the County has around KES2.4bn unpaid trade creditors (33% of FY17/18 revenue), mainly relating to development activity, which suggest challenges in meeting its financial obligations. Over the medium term, Kisumu County is considering approaching commercial funders or the debt capital markets to raise debt funding for development projects. The County debt management policy permits debt of up to 20% of the previous year’s revenue to be raised for development projects (in line with National Treasury regulations). Debt issuances must be approved by the County Assembly and longer term commercial funding will also require consent by the National Treasury, providing additional layers of oversight. Based on GCRs scenario analysis, and utilising Kisumu’s revenue forecasts, at the 20% limit Kisumu would comfortably be able to meet any debt service costs, even after accounting for scheduled creditor repayments and debt amortisation.
As County Governments operate on a cash basis, expenditure is only undertaken if there are sufficient cash resources available. Cash balances are only held at minimal levels and there are no unutilised funding facilities, which can give rise to liquidity concerns when there is insufficient cash to meet recurrent expenditure. A liquidity event occurred in Kisumu in Q1 FY19/20, where the County was not able to meet its salary bill due to exchequer releases not having been received. Nevertheless, Kisumu has consistently increased its cash holdings, with days cash on hand equating to a strong 90 days at FY17/18. The majority of this is held in ordinary revenue accounts, albeit some relates to work that has already been undertaken but the final payments not yet made, or was received close to financial year-end.
GCR has factored National Government support into the Kisumu County ratings. This is because the County fulfils a critical social service, being at the forefront of improving the day-to-day quality of life for its citizens. Moreover, the National Government has demonstrated ongoing financial support for the Counties through regular transfers and grants, as well as substantial technical support through the various Government departments. That said, GCR notes that there are no explicit guarantees issued to financial or trade creditors, on behalf of the County, and the settlement of all financial obligations remains the responsibility of Kisumu County. The financial support consideration is also somewhat tempered by the constrained National fiscus.
Positive rating action could arise if there is a sustained improvement in audit outcomes and stronger governance. A meaningful improvement in operating performance that manifests in increasing OSR and greater levels of development expenditure. Conversely, negative rating action could arise if the weaker operating performance persists, particularly if this translates into persistent delays in meeting staff and supplier obligations.
|Primary analyst||Eyal Shevel||Sector Head: Public Sector Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Secondary Analyst||Tavonga Muchemedzi||Credit Analyst|
|Johannesburg, ZA||Tavongam@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Head of Group Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Local and Regional Governments, June 2019|
|GCR Country Risk Scores, January 2020|
|GCR Rating Scales, Symbols and Definitions, May 2019|
|Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial/last||National||BB(KE)||Stable||March 2020|
|Short Term Issuer||Initial/last||National||B(KE)|
Risk Score Summary
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital Expenditure(“capex”)||Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Loan||A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.|
|Local and regional Governments (“LRG”)||Government entities possessing revenue raising capacity that are responsible for the administration of public policy for a given jurisdiction. These include metropolitan councils, local municipalities (of all sizes), district councils and state governments.|
|Long term||See GCR Rating Scales, Symbols and Definitions.|
|Own Source Revenue||Own source revenue are those income streams that are directly under the control of the public entity, and may include property rates, business and other licence fees, hospitality fees, fines, or any other charges through which an LRG can generate income.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||See GCR Rating Scales, Symbols and Definitions.|
|Transfers||Income received from a third party, most often a higher level of government or a donor. Includes exchequer releases, income provided by Government Departments, and or external parties such as development finance agencies.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit rating has been disclosed to County Government of Kisumu. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
County Government of Kisumu participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from County Government of Kisumu and other reliable third parties to accord the credit rating included:
- Audited financial results for Kisumu to 2017/2018 (Plus four years of comparative numbers);
- County Integrated Development Plan 2018-2022
- Kisumu Annual Development Plans and
- County Debt management Strategy Paper
- County Governments Act 2012
- Public Financial Management Act 2012
- Gross County Product Report 2019