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Correct: Fitch Downgrades Kenya's Local Currency IDR to 'B+'/Negative
July 29, 2016 / 10:16 AM / in a year

Correct: Fitch Downgrades Kenya's Local Currency IDR to 'B+'/Negative

(The following statement was released by the rating agency) HONG KONG, July 29 (Fitch) This announcement replaces the version published on 14 July 2016 to include an additional relevant criteria report dated 12 August 2014. The inclusion of the additional criteria reflects the committee decision to use the criteria dated 12 August 2014 to rate the Long-Term Local Currency (LTLC) IDR of Kenya in this review, ahead of the planned roll-out of the new criteria for all LTLC IDRs as part of a portfolio review completed in July 2016. Given the need to consider relativities across the portfolio, we were not able to apply the updated criteria in isolation in this individual country review. Fitch Ratings has affirmed Kenya's Long-Term Foreign Currency IDR at 'B+' and downgraded the Long-Term Local Currency IDR to 'B+' from 'BB-'. The Outlooks are Negative. 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 Currency IDR at 'B'. KEY RATING DRIVERS The downgrade of Kenya's Long-term local currency IDR reflects the following key rating drivers: Kenya's FY16/17 budget, announced on 8 June, continues the trend of increasing capital expenditure to fund infrastructure development and delaying fiscal consolidation. Fitch forecasts a FY16/17 general government fiscal deficit of 8.6% of GDP, which is lower than the 9.3% forecast in the National Budget, but well above the 'B' median of 4.2%. The agency expects current expenditure to remain high, at 16% of GDP. The FY16/17 budget prioritises spending in the agriculture and manufacturing sectors with the aim of increasing employment and as interest payments have increased to approximately 3% of GDP. Kenya's persistent fiscal deficits have resulted in an increase in general government public debt to 50% of GDP according to Fitch's estimates, broadly in line with peers. The government has come to rely heavily on domestic debt markets, with relatively high interest rates, and plans to borrow an additional USD2.2bn in the current budget year. As a result, Fitch expects Kenya's general government interest payments to remain high in FY16/17, at 14% of revenues, which is significantly higher than the 8% of revenues for the 'B' median. The FY16/17 budget contains a total financing requirement of USD6.9bn, of which USD4.6bn will be financed from external sources, mostly through commercial financing and project loans. At 42% of total public debt, foreign currency public debt is lower than 'B' rated peers, but the government plans to increase external borrowing in the current fiscal year. Kenya's growing stock of foreign-currency denominated debt will make the country more vulnerable to exchange rate shocks. The ratings also reflect the following key rating drivers: Kenya's general election is more than a year away, but there are already signs of heightened political tensions. Kenya experienced an economic and humanitarian crisis following its December 2007 general elections, in which up to 1,500 people were killed in ethnic violence and economic growth fell to 0.2% in the following year. Kenya's main opposition group, the Coalition for Reform of Democracy, has begun staging regular protests against the ruling Jubilee Alliance and the Independent Electoral and Boundaries Commission. These tensions have already resulted in several deaths. Economic growth remains robust, owing to high levels of infrastructure spending and private consumption buoyed by strong credit growth. Fitch forecasts 2016 growth at 5.8% year on year, after 5.5% in 2015. Kenya is increasingly attracting foreign companies as a base for business in Eastern Africa and improvements in infrastructure will gradually start boosting productivity. There is a risk that this will be insufficient to offset the impact on growth from a decline in infrastructure spending once fiscal consolidation sets in. Fitch expects the current account to narrow to 6.4% of GDP in 2016 from 10.1% of GDP in 2014, in part due to lower oil import payments. However, Kenya's exports remain low and the agency expects the current account deficit to remain above 6% in 2017. The current account has been financed by concessional financing and project financing, increasing FDI and remittance flows, with the latter two having been supported by improvements to the country's business environment. The narrowing current account deficit and the FX rate stability that Kenya has experienced in the past 12 months will support the Central Bank of Kenya's reserves accumulation. Fitch forecasts the official reserves position to rise to USD7.9bn in 2016, from USD7.5bn as of end-December 2015. Kenya's external financing flexibility is supported by an IMF programme. In March, the IMF approved a new 24-month Standby Arrangement (SBA) and 24-month Standby Facility (SBF). Together these give access to USD1.5bn, which Kenya only intends to use in case of heightened external financing strains. The IMF concluded that the preceding SBA and SBF had been broadly successful. As part of the new programme, the authorities have committed to increase domestic revenue by broadening the tax base and raising tax revenue. Fitch expects a slight increase in revenues in FY16/17, to 20.2% of GDP from 19.7% in 15/16. Kenya has experienced no large-scale attacks from Al-Shabaab since the April 2015 attack at Garissa University. However, the Islamist militant group continues to attack the Kenyan military operating in Somalia and targets in Kenya itself. In May, the Kenyan government announced plans to close the Dabaab refugee settlement, the world's largest refugee camp, which could have additional security repercussions. Kenya's ratings are constrained by low GDP per capita, which is less than half of the 'B' median. The country is in the 22nd percentile of the UN Human Development Index. Kenya's social and governance indicators are also weaker than the 'B' median. However, Kenya has improved its rank by 21 places to 108 in the 2016 World Bank's Doing Business Index, performing slightly better than the 'B' median. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Kenya a score equivalent to a rating of 'B+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger negative rating action are: - Failure to consolidate public finances and stabilise public debt/GDP. - A marked deterioration in the political environment and security undermining Kenya's long-term growth performance. The main risk factors that, individually or collectively, could trigger positive rating action are: - Effective implementation of a fiscal consolidation plan and stabilisation of public debt/GDP. - A longer track record of prudent economic management and further regulatory reforms to foster an improved business environment and faster economic growth. KEY ASSUMPTIONS Fitch assumes the global economy evolves broadly in line with the projections in its latest "Global Economic Outlook" Contact: Primary Analyst Jermaine Leonard Director +852 2263 9830 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Vouex Road Central Hong Kong Secondary Analyst Jan Friederich Senior Director +852 2263 4024 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria - Effective from 12 August 2014 to 26 May 2016 (pub. 12 Aug 2014) here Sovereign Rating Criteria - Effective from 26 May 2016 to 18 July 2016 (pub. 26 May 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1009688 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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