December 23, 2016 / 1:49 AM / a year ago

Fitch Affirms Kenya at 'B+'; Negative Outlook

(The following statement was released by the rating agency) HONG KONG, December 22 (Fitch) 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'. KEY RATING DRIVERS 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% 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%. Nevertheless, this remains well above the 'B' median of 4.2%. 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 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 USD1.5bn 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% in 1H16, 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. 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. 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% 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. 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. 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 a downgrade are: - Failure to consolidate the budget deficit and stabilise government debt/GDP. - Deterioration in the political or security environment undermining Kenya's long-term growth performance. - Widening of the current account deficit that stresses macroeconomic stability and leads to significant foreign exchange reserves drawdown. The Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to positive rating action. Developments that could, individually or collectively, result in a stabilisation of the Outlook include: - Effective implementation of a fiscal consolidation plan and stabilisation of government debt/GDP. - A longer track record of prudent economic management and structural 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 Voeux Road Central Hong Kong Secondary Analyst Federico Barriga Salazar Director +44 20 3530 1242 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017031 Solicitation Status here Endorsement Policy here 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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