Nairobi, 30 July 2021 – GCR Ratings (“GCR”) has downgraded the County Government of Makueni (“Makueni County” “the County”) national scale long-term issuer rating of BBB(KE) to BBB-(KE), with the Outlook maintained as Stable. At the same time, GCR has affirmed the national scale short term issuer rating of A3(KE).
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|County Government of Makueni||Long Term issuer||National||BBB-(KE)||Stable Outlook|
|Short Term issuer||National||A3(KE)|
The ratings on Makueni County balance moderately strong levels of liquidity, low levels of leverage and increasing own sources of revenue (OSR) against the small and undiversified Gross County Product (GCP) and moderately weak operating performance. The rating has been downgraded to reflect the more constrained Kenyan fiscal position, given the County’s high reliance on Exchequer releases, as well as the deterioration to a qualified audit outcome.
Makueni County, with an estimated population of just over 1 million, is predominantly rural, and highly reliant on subsistence agriculture. Key social indicators evidenced steady improvement over the five years to 2018, with electricity coverage increasing from 5.7% in 2013 to 20% in 2018, and water coverage increasing from under 25% to 36% over the same period. Nevertheless, indicators suggest that majority of the population remains poor with high multi-dimensional poverty estimated at about 60% (country average 53%).
Makueni’s OSR grew from around KES215m in FY14/15 to KES 512m in FY18/19 before moderating slightly to KES466m in FY19/20, due to the impact of Covid-19. However, the county is almost entirely reliant on Exchequer releases and grants that have contributed around 95% of income over the review period, above the national average of 91.3%. Not only has the county not been able to meet the estimated potential OSR revenues, collections have consistently fallen below budgetary expectations (FY18/19: 64.2% of budget, FY17/18: 53.2%). Going forward, the county is looking at ways of increasing OSR through automation of the Valuation Roll, infrastructure development, cashless payments and utilisation of revenue volunteers who sensitise the citizens on importance of paying taxes and levies to the county.
The ratio of staff costs to total expenditure at 37.6% in FY18/19 compares favourably to the average for all counties (FY18/19: 43.2%) but remains above the 35.0% recommended by the Public Finance Management (Amendment) Regulations, 2015. While the natural growth in OSR should help bring the ratio in line with the Act, the County is also freezing non-essential employment and automating revenue collection to obviate the need to replace retiring staff. Makueni’s absorption of its development budget has averaged 53.0% over the last 5 years (lower than the national average of 58.4%) resulting in a development expenditure to total expenditure of 20.0%, also below the recommended 30%.
Leverage and cash flow is a positive assessment as Makueni has not made use of debt funding over the review period. Nevertheless, the County is considering approaching the debt capital markets to raise debt to accelerate development projects. At this level, GCR expects the County to have sufficient resources to meet debt service obligations.
Makueni County’s liquidity assessment is also a positive rating factor as it has managed its accounting payables much better than other rated peers, closing the year with negligible outstanding pending bills (FY2018/19: KES8.5m; FY2017/18: KES33.6m). In addition, the accounts receivable which is mostly outstanding imprest has also been well contained.
Management and governance is a slight negative rating factor in this year’s ratings as a result of a qualified opinion from the Office of the Auditor General (“OAG”) in FY18/19 compared to FY17/18 when Makueni was one of the two counties which received unqualified audit opinions from the Auditor General. The main issues raised in the audit include: variances in Integrated Financial Management Information System (IFMIS) and the financial statements, revenue under collection, weak controls over revenue collection and lack of a risk management policy. We do note that the county has made progress in addressing the issues raised during the audit such as the formulation of a risk policy and resolving the variances between IFMIS and the financial statements.
GCR has factored government support into the ratings. This is because Makueni County fulfils a critical social service, being at the forefront of improving the day-to-day quality of life for their citizens. Division of revenue to the counties is enshrined in the constitution, and there are procedures for approving projects which are supported by the national government. In addition, the PFM Act 2012 Section 94 (1) (a) (i) states that failure to make payments and as when they fall due is a material breach that requires National Treasury intervention in terms of Article 225 of the constitution. The extraneous financial support consideration is also somewhat tempered by the constrained National fiscus which has worsened since our previous rating exercise.
The Stable Outlook reflects GCR’s view that Makueni’s financial position will remain sound, underpinned by low and adequate liquidity, even as OSR remains very low and expenditure pressure persists.
Positive rating action could arise if the county reverts to an unqualified audit opinion on a sustainable basis, significantly improves its development budget implementation and demonstrates sustained significant growth in OSR.
Negative rating action could arise if there is an increase in consumption expenditure, budgetary implementation worsens, operating performance deteriorates and if liquidity position worsens materially.
|Primary analyst||Eleanor Kigen||Senior Analyst|
|Nairobi, KE||EleanorK@GCRratings.com||+254 703 041618|
|Committee chair||Eyal Shevel||Sector Head: Public Sector Ratings|
|Johannesburg, ZA||Shevel@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, June 2021|
County Government of Makueni
|Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial/last||National||BBB(KE)||Stable||March 2020|
|Short Term issuer||Initial/last||National||A3(KE)|
RISK SCORE SUMMARY
|Rating factors and sub-factors||Risk score|
|Double country risk score||8.00|
|Sector risk adjustment||(1.00)|
|Management and governance||(0.50)|
|Leverage and capital structure||2.00|
|Government support floor||2.00|
|Total Risk Score||7.00|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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 RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to County Government of Makueni. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
County Government of Makueni participated in the rating process via virtual management meetings, 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 Makueni and other reliable third parties to accord the credit ratings included:
- Audited financial results to 2018/2019 (Plus four years of comparative numbers);
- County Integrated Development Plan 2018-2022
- Makueni Annual Development Plans and
- County Debt management Strategy Paper
- Various procedure documents
- Gross County Product Report 2019.