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Rating Action:

Moody's changes outlook on Kenya's rating to negative from stable; affirms the B2 rating

07 May 2020

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

No Related Data.
© 2020 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 INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S 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 INVESTORS SERVICE 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 MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE 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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