Fitch Affirms Kenya at B+ with Negative Outlook

Sovereign Ratings

Fitch Ratings onFriday announced that it affirmed Kenya’s long-term issuer default ratings 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+’.

Fitch said Kenya’s ratings was supported by the country’s strong growth potential and resilience to shocks, favorable 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.

The agency noted that 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% of GDP for the fiscal year ending June 2017 (FY17), down from 7.5% in FY16 and compared with the original budget target of 9.7%.

In a statement, Fitch said “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% of GDP at end-FY16 from 42% at end-FY13. Fitch forecasts it will rise further to 57% at end-FY17, just above the ‘B’ median of 56%. As a percentage of revenue the debt level is 287%, compared with the ‘B’ median of 230%. 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’s medium-term growth outlook remains strong. as public sector spending continues to bolster demand despite under-executing the capital budget.

The economy grew by 6.1% in the half period of 2016 and 5.7% in the the third quarter, as easing drought conditions improved agricultural output and tourism experienced a rebound.

Fitch forecasts full year 2016 growth to be 5.8%, owing to decelerating credit growth, and 6% in 2017, but uncertainty around the elections is a downside risk.

Consumer price inflation has remained within the central bank’s 5+/-2.5% inflation target, supported by the stability of the shilling and lower food and fuel prices. Inflation experienced a slight uptick to 6.7% in November, but it is still well below the 8% 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.

On Interest Capping Law

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% year-on-year in October 2016, down from 19.5% in October 2015. According to the Central Bank of Kenya, NPLs increased to 9.3% of gross loans as of October 2016, up from 5.7% in October 2015.

On 2017 Elections

In Fitch’s opinion, Kenya’s August 2017 general elections pose some security and economic risks. Some violent incidents appear likely, but it 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.

On C.A.D

The current account deficit remains sizeable and net external debt/GDP is rising. However, Fitch estimates the current account deficit declined to 6.6% of GDP in 2016, from 9.8% 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 USD7.3bn 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.

Ease Of Doing Business

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.

KEY ASSUMPTIONS

Fitch assumes the global economy evolves broadly in line with the projections in its latest “Global Economic Outlook”.

Reference Table:

S&P Moody’s Fitch Description
AAA Aaa AAA Prime
AA+ Aa1 AA+ High Grade
AA Aa2 AA
AA- Aa3 AA-
A+ A1 A+ Upper Medium Grade
A A2 A
A- A3 A-
BBB+ Baa1 BBB+ Lower Medium Grade
BBB Baa2 BBB
BBB- Baa3 BBB-
BB+ Ba1 BB+ Non-Investment Grade Speculative
BB Ba2 BB
BB- Ba3 BB-
B+ B1 B+ Highly Speculative
B B2 B
B- B3 B-
CCC+ Caa1 CCC Substantial Risks
CCC Caa2 Extremely Speculative
CCC- Caa3 In default with little prospect for recovery
CC Ca
C C
D / DDD In Default
/ DD
D

Source: (Fitch Ratings, Kenyan Wall Street)