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Rating Action:

Moody's affirms Kenya's B2 ratings; outlook remains negative

13 May 2021

New York, May 13, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Kenya's issuer and senior unsecured ratings at B2 and maintained the negative outlook.

The decision to maintain the negative outlook reflects ongoing downside risks to the government's efforts to deliver fiscal consolidation and reduce liquidity risk. While the government has begun to implement measures to broaden the revenue base and reduce the fiscal deficit, its lackluster track record in terms of delivering fiscal consolidation and achieving revenue targets means there are significant risks to the fiscal outlook. An inability to deliver on planned fiscal consolidation would leave Kenya vulnerable to tightening financing conditions.

The decision to affirm the B2 rating incorporates Kenya's weak fiscal metrics, as well as considerable governance challenges. It also takes into account 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.

Kenya's local currency and foreign-currency country ceilings remain unchanged at Ba2 and Ba3, respectively. The three-notch gap between the local-currency ceiling and the sovereign rating reflects the relatively weak institutions and policy predictability and moderate political risk set against a relatively small footprint of the government in the economy and limited external imbalances. The one-notch gap between the foreign-currency ceiling and the local-currency ceiling reflects relatively low external debt and a moderately open capital account, which reduce the incentives to impose transfer and convertibility restrictions.

RATINGS RATIONALE

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

ACHIEVING FISCAL CONSOLIDATION TARGETS WILL PROVE CHALLENGING

Moody's decision to maintain the negative outlook primarily reflects downside risks to the fiscal outlook, which would worsen Kenya's already high debt and interest burdens and could in turn increase financing risks if it is unable to deliver on ambitious fiscal consolidation targets set as part of the IMF program.

Kenya plans a gradual fiscal consolidation that will limit the deterioration in the sovereign's debt and interest burdens. In the near term, fiscal consolidation will rest primarily on the efficacy of tax measures already taken by the government and the withdrawal of pandemic-related spending. The reversal of pandemic-related tax cuts already supported improved revenue collection in the second half of the fiscal year ending 30 June 2021 (fiscal 2021). Moreover, the removal of several value-added tax (VAT) exemptions and the introduction of a minimum alternative tax will boost corporate income tax collection, further broadening the tax base.

Over time, the government intends to reduce the fiscal deficit further by reducing recurrent spending while aiming to prioritize key infrastructure projects, before undertaking further measures to broaden the tax base in later years of the IMF program.

However, Kenya's mixed track record in terms of fiscal consolidation suggests achieving the government's ambitious fiscal consolidation targets over a multi-year timeframe will prove difficult. These institutional challenges are reflected in the government's lackluster track record in terms of fiscal policy effectiveness, which resulted in a narrowing revenue base and larger-than-budgeted fiscal deficits in three of the past four years.

Taking into account these challenges, Moody's expects the fiscal deficit to narrow gradually, from 8.7% of GDP in fiscal 2021 to 6.8% of GDP by fiscal 2023. Moody's also expects the debt and interest burdens to peak by 2023, at 72.6% of GDP and around 28% of revenue, respectively, before declining very gradually, while remaining above the median for B-rated sovereigns.

Meanwhile, uncertainty over the economic recovery from the coronavirus pandemic poses significant downside risk to fiscal consolidation through lower-than-expected tax collection and the potential crystallization of contingent fiscal risks. The deteriorating financial performance of several large state-owned enterprises (SOEs) increases fiscal risks, either because of increased budgetary support being potentially needed or the crystallization of contingent liabilities related to outstanding guaranteed and non-guaranteed SOE debt.

Moreover, Kenya's political cycle, with a potential constitutional referendum in 2021 and elections in 2022, will likely challenge the reform agenda. A prolonged period of political uncertainty may damage business confidence and undermine growth.

IMMEDIATE LIQUIDITY RISK HAS MODERATED, BUT REMAINS PRESENT

With the agreement on an IMF program providing a tangible backstop, Kenya's immediate financing risks have eased due to slightly lower gross financing needs and expanded access to a diverse funding mix. However, a slower pace of fiscal consolidation than Moody's currently expects would increase financing needs and leave Kenya vulnerable to tightening financial market conditions.

Moody's expects Kenya's gross financing needs to decline to around 18% of GDP in fiscal 2022. The decline in gross financing needs reflects smaller fiscal deficits, savings from participation in the G-20 Debt Service Suspension Initiative (DSSI), and a reduction in domestic Treasury bills.

Moody's expects Kenya to meet its gross financing needs through a diverse funding mix, including external concessional and commercial borrowing and with greater reliance on the domestic debt market. If achieved, Kenya's already weak debt affordability metrics would not deteriorate further.

However, failure to deliver on the government's fiscal consolidation would increase liquidity risk, particularly if this were accompanied by an increase in external commercial borrowing or short-term domestic debt issuance. This would risk reversing some of the improvements in the government's debt structure and financing over the past year and leave the sovereign more vulnerable to shifts in financing conditions.

RATIONALE FOR AFFIRMING THE B2 RATING

The affirmation of the B2 rating balances the debt level and debt affordability challenges against key credit strengths, including Kenya's larger and more diversified economy relative to rated peers.

Kenya's economic strength is supported by a relatively diversified economy with high growth potential at around 6%, which provides some capacity to absorb economic shocks. The economy has grown robustly, averaging 5.8% real GDP growth between 2010 and 2019. In 2020, the coronavirus outbreak and related containment measures had a severe impact on activity in almost all sectors of Kenya's economy, with the tourism industry among the hardest hit.

In 2021 and 2022, Moody's expects Kenya's growth rate to return to its long-term average of around 6%, resulting in limited permanent scarring. In turn, a relatively stable economy would limit the risk of a sudden decline in the government's revenue base.

Kenya also benefits from a relatively deep domestic financial market which supports domestic, local currency debt issuance with longer tenors, alongside short-term debt issuance. Over the past year, the Kenyan government has improved the structure of its domestic debt, reducing the share of short-term Treasury bills, which has extended the average maturity and reduced rollover needs. The share of Treasury bills declined to 25% of total domestic debt in 2020, or 8.3% of GDP, down from 31% of total debt and 9.2% of GDP in 2019. The average term to maturity on the domestic debt stock stood at 5.5 years as of 30 June 2020, an increase from 4.7 years compared with a year earlier.

Kenya's creditworthiness remains constrained by institutional and governance challenges, as evidenced in weak fiscal policy effectiveness. Fiscal policy effectiveness has proven weak, as exhibited by the deterioration in fiscal metrics and erosion of the revenue-to-GDP ratio, which has limited the government's ability to narrow the fiscal deficit.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Kenya's ESG Credit Impact Score is highly negative (CIS-4) reflecting its highly negative exposure to social risks, as well as environment and governance risks, while resiliency is constrained by the high debt burden.

Kenya's exposure to environmental risks is highly negative (E-4 issuer profile score) reflecting physical climate risks, water risk and natural capital risks, given the significant risks posed by climate events on the economy and government finances. Kenya is vulnerable to shifts in seasonal rain patterns, which can affect the income of a sizeable portion of the population that relies on the agriculture sector.

Exposure to social risks is highly negative (S-4 issuer profile score) capturing high levels of poverty as well as health and safety risks, high unemployment rates, and limited access to basic services. High poverty rates result in high levels of undernourishment and high child mortality rates, which constrain Kenya's human capital.

The influence of governance on Kenya's credit profile is highly negative (G-4 issuer profile score) and captures Kenya's weak fiscal policy effectiveness as well as high levels of corruption and weak rule of law.

GDP per capita (PPP basis, US$): 4,985 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5.4% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.8% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -7.7% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.8% (2019 Actual) (also known as External Balance)

External debt/GDP: 35.8% (2019 actual)

Economic resiliency: ba2

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

On 10 May 2021, 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 institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely in the near future given the negative outlook. Moody's would change the outlook to stable if the delivery of fiscal consolidation measures increases confidence the debt and interest burden will stabilize at levels consistent with the B2 rating. Upward rating pressure would arise from a more durable improvement in government fiscal metrics, particularly if accompanied by progress on broadening the revenue base and strengthening of the country's fiscal policy effectiveness.

A downgrade would be likely if debt metrics were to deteriorate more than currently expected by Moody's, with the debt burden rising markedly for several years, potentially because of slower progress on fiscal reforms than currently expected or because growth prospects have diminished. Furthermore, a tightening of financing conditions, which contributes to a rise in borrowing costs and challenges the government's ability to refinance maturing debt would also place downward pressure on the rating.

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

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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