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Rating Action:

Moody's affirms Kenya's B1 sovereign rating, maintains stable outlook

12 Feb 2016

London, 12 February 2016 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Kenya's issuer rating of B1, and maintained the stable outlook.

The key drivers of the affirmation are Moody's expectations that:

1. Kenya's growth performance will remain solid, supported by a substantial level of infrastructure spending which will boost productivity; a rapidly expanding services sector; and a near-term improvement in the country's terms of trade. Kenya is well-positioned to benefit from greater economic integration in East Africa over the coming years further cementing its economic position within the region.

2. Kenya's sizeable fiscal and current account deficits will begin narrowing from FY2016/17 over the next three years as policymakers pursue a contractionary stance of fiscal policy. This will reduce Kenya's reliance on external debt financing and ensure fiscal sustainability. As a net oil importer, Kenya's external position is already benefitting from the decline in oil prices.

Moody's has left the local-currency bond and deposit ceilings unchanged at Ba1 and left the foreign-currency bond ceiling unchanged at Ba2 as well as the foreign-currency deposit ceiling at B2.

RATINGS RATIONALE

FIRST DRIVER -- STRONG ECONOMIC GROWTH PROSPECTS

The first driver of the affirmation is the country's strong growth prospects. Kenya's economy is expanding rapidly -- real GDP expanded by an estimated 5.7% in 2015 compared to an average of 5.3% for similarly rated Moody's peers. Overall, growth continued to be broad-based, supported by strong expansion across all sectors of the economy, with the exception of the tourism sector where the country's security challenges have contributed to a long downturn.

Growth prospects for 2016 and onwards remain strong. We project real GDP growth of 5.5% in 2016 rising to 6% by 2018. The drivers will remain broad based and include continued albeit declining public investment spending and productivity gains from the completion of key infrastructure projects, notably the Standard Gauge Railway; greater regional integration; robust household consumption supported by low inflation and fuel prices; and a recovery of the tourism sector, the latter supported by the lifting of the last remaining travel advisories to Kenya by foreign governments.

SECOND DRIVER -- DECLINING FISCAL AND EXTERNAL IMBALANCES

The second driver reflects our expectation that Kenya's fiscal and current account deficits will begin narrowing from FY2016/17 as the government pursues a contractionary fiscal policy over the next three years. Like other frontier and emerging markets, Kenya has experienced periodic episodes of capital outflows since the "taper tantrum" driven financial market turbulence in 2013. Against this backdrop of increased global financial market volatility and rising investor risk aversion, a fiscal tightening will reduce Kenya's reliance on external debt financing and its vulnerability to global financial market shocks. It will also directly address investor concerns over the country's domestic and external imbalances.

Specifically, the government aims to increase revenue to 21.4% of GDP over the next three years from 20.3% of GDP in FY2014/2015, while containing the growth of total expenditures, with the latter declining from 29.6% of GDP in FY2014/15 to 26.5% of GDP over the same period. Expenditure cuts will focus on recurrent spending, but capital spending is expected to gradually decline from current levels as a number of large infrastructure projects reach completion. Consequently, the overall fiscal deficit is projected to decline from 8.5% in FY2014/15 to 8.1% in FY2015/16, and gradually reach 4.3% of GDP by FY2018/19. We expect debt levels will peak at 50% of GDP in 2016, and begin trending downwards thereafter alongside Kenya's debt affordability (interest payments to revenue).

At the same time, we expect the current account deficit to narrow from 9.5% of GDP in 2015 to around 6.7% of GDP over the next three years, supported by the positive terms of trade and the decline in capital imports related to infrastructure projects. This will allow Kenya to reduce external debt financing from the current high levels.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects our expectation of a continued strong growth performance, and our view that Kenya's sovereign credit profile will remain resilient to current pressures from global financial volatility. Heightened external volatility poses risks, given Kenya's large twin deficits and its reliance on external financing. But the terms of trade improvement has improved the external position.

WHAT COULD CHANGE THE RATING - UP

A significant over-performance with regard to growth, fiscal consolidation and the external position would put upward pressure on Kenya's rating. Also credit positive would be a decline in terrorist incidents that would improve the environment for tourism.

WHAT COULD CHANGE THE RATING - DOWN

A continuation or escalation of security incidents - or a renewal of political instability - that substantially dampens economic growth prospects could put downward pressure on Kenya's rating, as could mounting fiscal slippages that prevent a stabilization and eventual reversal of the rise in government indebtedness. In particular, the process of fiscal devolution to newly created counties or large increases in public sector wages could result in larger than anticipated deficits as well as increased political infighting.

GDP per capita (PPP basis, US$): 3,099 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5.3% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 8.0% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -8.6% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -10.4% (2014 Actual) (also known as External Balance)

External debt/GDP: 26.7% (2014 Actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 09 February 2016, 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 economic fundamentals, including its economic strength, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

This rating was not initiated or not maintained at the request of the rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a non-participating entity. The rated entity or its agent(s) generally does not provide Moody's with information for the purposes of its ratings process.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Rita Babihuga
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Kenya's B1 sovereign rating, maintains stable outlook
No Related Data.
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