Kenya’s credit rating at risk due to rising political tensions

Concerns over Kenya’s increasingly tense political environment and fiscal deficits have for the second time since last October kept the country’s credit outlook negative from stable with the possibility of a downgrade in the coming months.

Global ratings agency Standard & Poor’s (S&P) has therefore affirmed Kenya’s sovereign credit rating at ‘B+’ for the long term and ‘B’ for the short term, saying that the negative outlook means that there is a 33 per cent chance of a downgrade within six to 12 months.

Kenya’s fiscal deficit has remained at about eight per cent and above in the past few years, though the National Treasury has promised to bring it down.

A deterioration of Kenya’s financial conditions that leads to a significant loss of foreign exchange reserves that currently stand at $7.65 billion (Sh771 billion) would also contribute to a lowering of the rating, which would in turn affect the ratings of individual companies.

Kenya’s business community—especially in the tourism sector— has raised concerns over the effects on the economy of the increasingly confrontational approach to politics characterised by violent demonstrations ahead of next year’s General Election.

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“We could lower the ratings if Kenya’s fiscal deficits were to increase further or debt increased more than we currently expect. We could also lower the ratings if political tensions flare up and undermine stability-oriented economic policy making, or if Kenya’s external liquidity or financial conditions markedly deteriorate and lead to a significant loss of foreign exchange reserves and widening external financing gap,” said S&P in the latest sovereign rating update on Kenya.

Sovereign ratings are used by international investors as a guide to the level of risk when investing in a country, meaning that a good rating eases the access and terms when a country is borrowing from international markets.

S&P has also raised concerns over the country’s revenue collection performance, which combined with higher expenditure on the standard gauge railway project, defence and interest payments on government debt have strained the country’s budget.

The Kenya Revenue Authority faces a tough task of filling the Sh327 billion hole in revenues by the end of the current fiscal year, having collected a total of Sh888.1 billion in the 10 months to April against a target Sh1.215 trillion for the financial year.

READ: KRA’s tough call of raising Sh327bn in two months to June

Although the outlook remains negative, S&P does see some positives in the economy that have contributed to the retention of the B+/B rating for the time being.

“Conversely, if we see improved prospects for lasting political and economic stability, we could reverse the outlook to stable. Supporting factors would include predictable and improving public finances, particularly regarding expenditure control,” said S&P.

The country’s fiscal deficit could also narrow as the multibillion shilling standard gauge railway (SGR) winds down and the recently introduced government financial consolidation measures are implemented.

The difference between Kenya’s imports and exports has declined to 5.8 per cent of the country’s GDP from 9.8 per cent in 2014 and the central bank has forecast it to fall further this year to 5.5 per cent.

Kenya’s overall economic growth is also expected to remain robust in the medium term, with S&P projecting an annual growth rate of six per cent for the 2016 to 2019 period.

Investments in infrastructure are expected to drive economic growth. The completion of the first phase of the SGR from Mombasa to Nairobi, for example, is expected to lower transport costs while lower cost of energy resulting from increased use of geothermal and wind power will substitute expensive thermal power.

The two investments are expected to spur private sector investments in manufacturing and other sectors of the economy.