OREANDA-NEWS. Budgets announced last week in the East African Community (EAC) were firmly expansionary in Kenya and Uganda, while Rwanda maintained a more cautious fiscal stance, Fitch Ratings says.

All three sovereigns are rated 'B+'/Stable. Kenya's and Uganda's FY16 budgets (for the financial year to end-June 2016) push fiscal consolidation further out into the future, risking an increase in debt which, if sustained, could undermine their sovereign ratings. Rwanda's budget foresees faster consolidation, but medium-term fiscal targets may prove challenging as direct budget support from foreign donors falls.

The continued investment in large-scale infrastructure projects envisaged in the EAC budgets will support economic growth. Capital expenditure as a percentage of GDP will remain in double digits in Rwanda and Kenya (where we expect real GDP growth of close to 6% and 7% respectively in FY16. Uganda's FY16 budget sees capital spending jumping to 11.3% of GDP from 8% in FY15 as spending on two new hydropower dams and upgrading Entebbe airport ramp up.

Containing current spending would help balance the need for large scale infrastructure investment with the risk of rising debt levels, but this is not a feature of Uganda or Kenya's FY16 budgets. Uganda's budget foresees the deficit widening sharply, to 6.9% of GDP in FY16 from an estimated 4.5% in FY15. Kenya's budget forecasts the deficit widening to 8.7% of GDP in FY16 (Fitch forecasts 7.8% in FY15).

The Rwandan budget also focuses on infrastructure development, but foresees only modest growth in current expenditure. As a result, the authorities have announced a FY16 deficit target of 4.4% of GDP, down from an expected deficit of 5.2% in FY15. This is consistent with our view that fiscal consolidation will steadily reduce Rwanda's annual deficits. However, the aim of cutting the deficit by 2.4% of GDP by FY17 will prove challenging as foreign assistance shifts from grants to concessionary loans.

Budget speeches also highlighted the importance of mobilising more revenue and improving the efficiency of spending and public services. Such measures would be positive if successfully enacted. Tax revenue as a percentage of GDP is low in Uganda and Rwanda, averaging only 14% and 16% respectively. In Uganda and Kenya the authorities expect changes to tax policy and administrative measures to yield tax revenue increases worth 0.5% of GDP (including Kenya's capital gains tax introduced in January 2015).

Aggregate EAC sovereign debt has been on an upward trajectory, rising by 11 percentage points of GDP since FY08, to 26.7% in FY15. Medium-term fiscal frameworks are designed to support fiscal consolidation, albeit at a modest pace in Kenya and Uganda, where the budgets predict a deficit narrowing, to 4.5% and 4% respectively by FY18.

The authorities expect Kenya's debt-to-GDP ratio to breach 50% in this fiscal year, the highest level since 2004. The Ugandan authorities expect debt to edge up towards 40% of GDP in the medium term. Rwanda's public debt is lower, at around 30% of GDP, and the fiscal consolidation should mean further increases are modest.