Wednesday 04, January 2017 by Matthew Amlôt

Fitch affirms Kenya at 'B+'; negative outlook

Fitch Ratings has affirmed Kenya's Long-Term Foreign and Local Currency IDRs at 'B+' with a Negative Outlook. The issue ratings on Kenya's senior unsecured Foreign-Currency bonds have also been affirmed at 'B+'. The Country Ceiling has been affirmed at 'BB-' and the Short-Term Foreign and Local Currency IDRs at 'B'.

Kenya's ratings are supported by its strong growth potential and resilience to shocks, favourable business climate and only moderate exposure to commodity prices. However, its ratings are constrained by its low GDP per capita, sizeable twin budget and current account deficits and rising public and external debt ratios, as well as by political risks. 

Kenya is starting to make headway in reducing its budget deficit, but it remains substantial and the consolidation path is subject to downside risks. Fitch forecasts a fiscal deficit of 7.1 per cent of GDP for the fiscal year ending June 2017 (FY17), down from 7.5 per cent in FY16 and compared with the original budget target of 9.7 per cent. Nevertheless, this remains well above the 'B' median of 4.2 per cent. The possibility of under-performing tax revenues and increased current expenditures around the August 2017 general elections represent a downside risk, although this is balanced against Kenya's history of under-executing capital expenditures.

Kenya's large and persistent fiscal deficits have led to a steady increase in gross general government debt, to 55 per cent of GDP at end-FY16 from 42 per cent at end-FY13. Fitch forecasts it will rise further to 57 per cent at end-FY17, just above the 'B' median of 56 per cent. As a percentage of revenue the debt level is 287 per cent, compared with the 'B' median of 230 per cent. Kenya's debt sustainability will rely on its ability to continue to reduce the primary fiscal deficit and to maintain high levels of economic growth.

Kenya has committed to an economic programme that includes increasing government revenues and increasing the efficiency and transparency of expenditures. The programme is supported by an IMF stand-by arrangement and a stand-by credit facility that would make available a combined $1.5 billion in financing should Kenya experience a significant external shock. 

The medium-term growth outlook remains strong. Public sector spending continues to bolster demand, despite under-executing the capital budget. The Kenyan economy grew by 6.1 per cent in 1H16, as easing drought conditions improved agricultural output and tourism experienced a rebound. Fitch forecasts full year 2016 growth to be 5.8 per cent, owing to decelerating credit growth, and six per cent in 2017, but uncertainty around the elections is a downside risk.

Consumer price inflation has remained within the central bank's 5+/-2.5 per cent inflation target, supported by the stability of the shilling and lower food and fuel prices. Inflation experienced a slight uptick to 6.7 per cent in November, but it is still well below the eight per cent reached as of end-December 2015. Lowered inflation expectations have allowed the Central Bank of Kenya to lower the benchmark Central Bank Rate by a total of 150 bps in 2016.

In August 2016, the Kenyan Parliament passed a law capping the rates that lenders can charge at 400 bps above the central bank policy rate. Fitch is sceptical that the interest rate cap will increase overall credit by increasing demand as the authorities expect. In the near term, the rate cap will more likely put additional pressure on bank profitability and willingness to lend. Credit to the private sector grew at 4.8 per cent year-on-year in October 2016, down from 19.5 per cent in October 2015. According to the Central Bank of Kenya, NPLs increased to 9.3 per cent of gross loans as of October 2016, up from 5.7 per cent in October 2015.

Kenya's August 2017 general elections pose some security and economic risks. Some violent incidents appear likely, but Fitch does not expect it to be anything like the scale of the 2007 elections, when up to 1500 people were killed in ethnic violence. The opposition Coalition for Reform of Democracy coalition reached agreement in principle with the governing Jubilee party over the composition of the Independent Electoral and Boundaries Commission, but it has yet to be fully staffed, after a dispute which flared into protests and violence earlier in the year. Kenya's overall security situation has also seen improvement, highlighted by the removal of travel advisories by both the US and UK foreign ministries and by the increase in tourism over 2017.

The current account deficit remains sizeable and net external debt/GDP is rising. However, Fitch estimates the current account deficit declined to 6.6 per cent of GDP in 2016, from 9.8 per cent in 2014, thanks to tapering capital imports and lower oil prices. Higher oil prices mean a risk of the current account widening in 2017 and 2018. Increasing external debt payments have led to the gradual drawdown of foreign exchange reserves, which stand at $7.3 billion as of mid-December. Nonetheless, at 4.7 months of current external payments, the reserves level is adequate. Kenya's IMF programme provides additional support for the external position.

Kenya has improved its rank by 21 places to 108 in the 2016 World Bank's Doing Business Index, a level better than the 'B' median. The country is in the 22nd percentile of the UN Human Development Index.

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