New York, February 13, 2018 -- Moody's Investors Service ("Moody's") has today downgraded the issuer
rating of the Government of Kenya to B2 from B1 and assigned a stable
outlook. This concludes the review for downgrade that commenced
on October 2, 2017.
The drivers of the downgrade relate to an erosion of fiscal metrics and
rising liquidity risks that point to overall credit metrics consistent
with a B2 rating. The fiscal outlook is weakening with a rise in
debt levels and deterioration in debt affordability that Moody's
expects to continue. In turn, large gross financing needs
and reliance on commercial external debt will maintain government liquidity
pressures. While the government aims to improve the efficiency
of spending and revenues, such measures are unlikely to be effective
enough to stem a weakening in fiscal trends.
At B2, risks are balanced, and supportive of a stable outlook.
Kenya retains strong fundamental economic strengths with a relatively
diversified economy that holds strong growth potential. Moreover,
Kenya has a relatively deep capital market and mature financial sector,
which affords the government some capacity to issue domestically in local
currency and with longer tenors.
Concurrently, Moody's has lowered the long-term foreign-currency
bond ceiling to Ba3 from Ba2 and the long-term foreign-currency
deposit ceiling to B3 from B2. Moody's has also lowered the
long-term local-currency bond and deposit ceilings to Ba2
from Ba1.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO B2
EROSION OF FISCAL STRENGTH DUE TO A RISE IN DEBT LEVELS AND DETERIORATION
IN DEBT AFFORDABILITY
Moody's expects Kenya's fiscal metrics to continue deteriorate,
as large primary deficits combine with worsening debt affordability and
rising debt levels.
Moody's forecasts government debt to increase to 61% of GDP
in fiscal year 2018/19 (the year ending in June 2019), from 56%
of GDP in FY 2016/17 and 41% of GDP in FY 2011/12. Large
infrastructure-related development spending needs combined with
subdued revenue collection and a rising cost of debt will result in large
fiscal deficits and keep government debt on an upward trend. Moody's
expects the primary deficit to remain above 4.0% of GDP
over the next two years, after 5.3% of GDP in FY 2016/17.
Debt affordability is deteriorating as reflected by the increase in government
interest payments as a share of revenue to 19% in FY2017/18,
from 13.7% in FY2012/13. We expect a further rise
to 20% in 2018. Kenya's government external debt,
which stood at 31.6% of GDP as of June 2017, continues
to shift away from concessional debt toward commercial and semi-concessional
debt, leading to higher financing costs. Between June 2013
and June 2017, the share of commercial external debt increased from
7% to 31% of total external debt. An increase in
the stock of short-term domestic debt as a percentage of GDP also
contributes to a rising interest burden.
Structural fiscal reform will be key to approaching the government's
ambitious medium-term objectives of fiscal consolidation and strengthening
fiscal resilience, but are unlikely to have a material nearer-term
impact on fiscal performance. Efforts to streamline and modernize
public spending can result in improvements in efficiency, which
would create fiscal space for development spending or to limit fiscal
imbalances. Kenya's expenditure reform plans include 'zero-based
budgeting' to reduce wasteful spending, better management
of the public wage bill, and increased planning and budgeting of
public investments. The Kenyan Treasury also plans to focus on
improving the efficiency of tax collection and compliance by increasing
the capacity of the Kenyan Revenue Authority, rolling out IT-related
measures to reduce undervaluation of taxable income and concealment of
imports, and expanding the tax base through targeted measures aimed
at the informal sector of the economy.
Although the government aims to reduce the size of the fiscal deficit,
given a mixed track record in terms of implementation of fiscal consolidation
and demands for development and social spending on the government's
budget, effective fiscal consolidation is likely to be slower than
the government envisages and unlikely to be sufficient to reverse the
deterioration in fiscal strength.
RISING GOVERNMENT LIQUIDITY RISK
The government will continue to face liquidity pressures due to a combination
of large financing needs and an increased reliance on sources of financing
with less predictable costs, in particular commercial external borrowing
and short-term domestic debt. Financing needs will increase
to high levels compared with other sovereigns, at around 22%
of GDP by FY 2018/19, having reached 19% of GDP in FY 2016/17.
The risk of financing stress will increase as more commercial external
borrowing, denominated in foreign currency, begins to mature
over the next few years, particularly in an environment of rising
global interest rates and a number of sub-Saharan African sovereigns
seeking refinancing at the same time. Kenya's first Eurobond
payment of $750 million (1% of forecast GDP) is due in June
2019, followed by a second $2 billion Eurobond maturing in
2024. A syndicated loan originally taken out in 2015 and worth
$750 million was extended by six months in October 2017,
with 90% of investors agreeing to extend the maturity to April
2018.
The increase in short-term domestic debt, to 9.4%
of GDP at the end of FY 2016/17 from 3.3% of GDP five years
earlier, will also test the capacity of the government to roll over
a large stock of debt on the domestic market at moderate costs.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects the broadly balanced credit pressures at the
B2 rating level.
Kenya's economic strength is supported by a relatively diversified
economy with high growth potential at around 6.0-6.5%,
which provides some capacity to absorb economic shocks. In turn,
a relatively stable economy limits the risk of a sudden slump in the government's
revenue base.
Moreover, Kenya has a relatively deep capital market and mature
financial sector, which affords the government some capacity to
issue domestically in local currency and with longer tenors -- alongside
short-term debt issuance. We estimate that the average maturity
of outstanding domestic bonds with an initial maturity of more than 364
days stood at 7 years in August 2017. Furthermore, liquidity
pressures are somewhat mitigated by the central government's deposits
within the domestic banking sector, estimated at 6% of GDP
at the end of FY 2016/17, which could be used as a financing source
in case of need.
FACTORS THAT COULD LEAD TO AN UPGRADE
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 put upward pressure on Kenya's rating.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Downward pressure on the rating would emerge if fiscal slippage were to
lead to a more rapid increase in the debt burden than Moody's currently
expects. A sustained increase in borrowing costs, denoting
more intense liquidity pressure than Moody's assesses, would
also put downward pressure on Kenya's credit metrics and rating.
GDP per capita (PPP basis, US$): 3,540 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.7% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.5%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -8.9%
(2016-17 Actual Fiscal Year) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.1% (2017 Actual)
(also known as External Balance)
External debt/GDP: 30.0% (2017 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 08 February 2018, 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 this rating was Sovereign Bond Ratings
published in December 2016. 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 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.
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.
Lucie Villa
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
