New York, May 07, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on the Government of Kenya's ratings to
negative from stable. Concurrently, Moody's has affirmed
Kenya's B2 issuer and senior unsecured ratings.
The negative outlook reflects the rising financing risks posed by Kenya's
large gross borrowing requirements, which include amortization of
external bilateral debt and the need to refinance a large stock of short-term
domestic debt, at a time when the fiscal outlook is deteriorating
due to the erosion of the revenue base and a debt structure that exposes
Kenya's fiscal metrics to exchange rate and interest rate shocks.
While Kenya does not face acute financing pressures, the severe
tightening of financial conditions will challenge the government's
ability to meet larger gross financing needs without an increase in borrowing
costs that would threaten medium-term fiscal consolidation efforts.
The rapid and widening spread of the coronavirus outbreak is creating
a severe and extensive credit shock across many regions and markets.
Weaker growth and larger fiscal deficits will further aggravate Kenya's
already high debt and interest burdens. The decision to affirm
the B2 rating balances those pressures against fundamental economic strengths
including a relatively large and diversified economy with high growth
potential, and quite deep domestic financial markets. It
reflects Moody's expectation that Kenya will not participate in any debt
relief initiative that requires the participation of private sector creditors,
which could carry further negative implications for the country's
rating, and more generally that Kenya will meet all its debt service
commitments to private sector creditors.
Kenya's long-term foreign-currency bond ceiling and
long-term foreign-currency deposit ceilings remain unchanged
at Ba3 and B3, respectively. The Ba2 long-term local-currency
bond and deposit ceilings remain unchanged as well.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL424171
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
HEIGHTENED LIQUIDITY RISK GIVEN LARGE, GROWING FUNDING NEEDS AMID
TIGHTER FINANCIAL CONDITIONS
Kenya's large gross funding needs make it vulnerable to tightening
financial market conditions. Contrary to previous expectations
of declining borrowing requirements underpinning the rating, Moody's
expects gross borrowing requirement will remain around 22% of GDP
in fiscal year 2020/21 (ending June 30, 2020), a relatively
high level compared with other sovereigns.
Although Kenya does not have any large principal payments due in the near
term -- the next Eurobond principal payment is in 2024 -- the
country is at the start of a more difficult external amortization schedule.
In each of the next three years, Kenya will need to repay on average
1.7% of GDP in external principal amortizations, in
addition to any potential external financing of the fiscal deficit.
This more challenging external amortization schedule coincides with a
tightening of external financial conditions as a result of the coronavirus
outbreak.
The challenges posed by the external amortization schedule are compounded
by a large stock of domestic debt that needs to be rolled over on annual
basis. Treasury bills account for 31% of domestic debt as
of December 2019, up from 25% of domestic debt at the end
of 2014. Since September 2016, a cap on bank lending rates
incentivized domestic banks to hold government securities relative to
riskier lending to the private sector. The removal of the lending
rate cap in November 2019 has increased the sensitivity of market yields
to the government's domestic borrowing requirements. Nevertheless,
access to a relatively deep domestic financial market somewhat mitigates
the immediate financing risk from the tightening in external market conditions.
Moody's expects that the government will rely on concessional multilateral
financing for much of its additional borrowing requirements in fiscal
year 2019/20 and fiscal year 2020/21, with the remainder covered
through increased domestic borrowing. It is possible that the government
may also seek other forms of relief, possibly including on loans
from Chinese state-owned banks. Moody's does not currently
expect Kenya to participate in any debt relief initiative that would require
the participation of private sector creditors. A decision to do
so could carry negative implications for the country's rating.
More generally, delays or changes in debt service payments owed
to private sector creditors compared to the original terms of the contract
could be negative for the sovereign's rating.
SIGNIFICANT RISKS TO THE FISCAL OUTLOOK DRIVEN BY A FURTHER EROSION OF
THE REVENUE BASE AND A DEBT STRUCTURE THAT EXPOSES KENYA TO EXCHANGE RATE
AND INTEREST RATE SHOCKS
Financing risks are rising at a point when Kenya's fiscal strength
is eroding. The shock to growth and larger fiscal deficit as a
result of the coronavirus outbreak will worsen Kenya's already high
and increasing debt and interest burdens.
The combined impact of border closures and measures to contain the spread
of the coronavirus, as well as supply chain disruptions, will
weigh on almost all sectors of Kenya's economy. Moody's
expects Kenya's real GDP growth to slow to 1% in 2020 from
5.4% in 2019, well below the five-year average
of 5.6%. Lower growth, combined with recently
announced tax measures and increased spending, will result in the
government's fiscal deficit widening to 8.5% of GDP
in fiscal year 2019/20 and 9.1% of GDP in fiscal year 2020/21.
This follows several years of larger than expected deficits.
The government's fiscal policy response to the coronavirus shock
increases uncertainty over the medium-term fiscal outlook.
Stimulus-related revenue measures include a number of permanent
tax cuts that will reduce revenue collection even when economic growth
recovers and may be difficult to reverse. This will reduce the
government's capacity to service its debt burden. Larger
primary and fiscal deficits over the next two years will increase the
debt burden to around 70% of GDP by the end of fiscal 2020/21.
Moreover, the debt-to-revenue ratio will increase
to over 400% by fiscal year 2020/21, a far more significant
deterioration than Moody's expects in most other B-rated
sovereigns. Kenya's already weak debt affordability will
deteriorate further with the interest-to-revenue ratio increasing
to 27% by fiscal year 2020/21, reducing available revenue
to cover primary expenditures.
Kenya's debt structure increases risks to the fiscal outlook.
Foreign-currency debt accounts for around half of Kenya's
general government debt, creating an exposure to exchange rate depreciation.
Since the beginning of the year, the Kenyan shilling has depreciated
by 5.5% against the US dollar. Moreover, the
large stock of short-term domestic debt (mostly Treasury bills
held by local banks) heightens the government's exposure to higher
interest rates. An increase in domestic borrowing costs would quickly
lead to a higher interest-to-revenue ratio.
RATIONALE FOR AFFIRMING THE B2 RATING
The B2 rating incorporates Kenya's fundamental economic strengths
including its relatively large and diversified economy with high growth
potential which provides some absorption capacity to economic shocks,
as well as its relatively deep domestic financial markets which support
domestic, local currency debt issuance. The B2 rating also
captures the credit challenges pertaining to the weak fiscal metrics.
Government finances have continued to deteriorate due to eroding revenue,
high development spending, and the rising cost of debt.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental risks inform Kenya's credit profile primarily through Moody's
assessment of economic strength. Floods and droughts have an adverse
effect on the economy, particularly for those who derive income
and employment from the agriculture sector. Low wealth levels limit
the ability of households to buffer the impact of lost earnings because
of weather-related events. Moody's has identified
Kenya as one of those countries whose credit profile is most susceptible
to climate change.
Social considerations are important for Kenya's credit profile.
Credit challenges include low wealth levels and high poverty rates,
as well as limited access to essential services in certain parts of the
country and high crime rates. These are important policy issues
for the government, as reflected in the inclusion of improved access
to education and housing in the president's "Big Four" policy
agenda. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and Safety.
In terms of governance, Kenya scores poorly on institutional factors,
including those measured by the Worldwide Governance Indicators,
with control of corruption and public financial management representing
particular challenges.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely in the foreseeable future given the negative outlook.
Moody's would change the outlook to stable if the rating agency
were to conclude that the government was likely to maintain sufficiently
broad funding options to meet its larger funding needs without a significant
increase in borrowing costs. The effective implementation of structural
fiscal reforms to narrow the fiscal deficit, which would stabilize
and eventually reduce the debt burden, improve debt affordability,
and reduce liquidity risks would support Kenya's current rating level.
Moody's would likely downgrade the rating if it were to conclude
that the ongoing deterioration in Kenya's debt burden and debt affordability
was likely to exacerbate liquidity risks, raising questions over
the government's ability to refinance maturing debt. While
not Moody's current expectation, indications that the government
was likely to participate in debt relief initiatives which Moody's concluded
were likely to entail losses for private sector creditors would be negative
for the rating. In general, an increasing likelihood that
Kenya may delay payments on debt owed to private sector creditors could
be negative for the rating.
GDP per capita (PPP basis, US$): 3,705 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.3% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.7%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -7%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.8% (2018 Actual)
(also known as External Balance)
External debt/GDP: 36.1% (2018 actual)
Economic resiliency: ba2
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 04 May 2020, a rating committee was called to discuss the rating
of the Kenya, Government of. The main points raised during
the discussion were: The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer has become increasingly susceptible to event risks.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings includes additional disclosures that
vary with regard to some of the ratings. Please click on this link
https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL424171
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Lead Analyst
Releasing Office
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are unsolicited.
a.With Rated Entity or Related Third Party Participation:
NO
b.With Access to Internal Documents: NO
c.With Access to Management: NO
For additional information, please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
David Rogovic
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
