S&P raises Kenya’s credit rating from negative to stable

Global ratings agency Standard & Poor’s (S&P) has upgraded Kenya’s credit outlook to stable from negative, citing sustained economic growth, reduced political tension and stabilising public debt.

S&P’s move to upgrade the credit outlook bodes well for the government when it moves to borrow from the international market to plug the gaping budget deficit of Sh689 billion in the current fiscal year.

In its previous sovereign update on Kenya in June, S&P had opted to affirm a negative outlook on East Africa’s largest economy, saying there was rising political tension in the country while the fiscal deficit was widening.

The agency had put the chances of a rating downgrade at 33 per cent as a result.

The reduced political tension and government efforts to curb spending have, however, convinced S&P to reduce the risk profile of Kenya.

The agency now says that it could actually raise Kenya’s credit rating if there are prospects for sustained political and economic stability, including declining budgetary imbalances supported by expenditure control and a sustained improvement in Kenya’s external accounts.

“Since our last review, government financing pressures have abated somewhat, interest rates have come down, and the exchange rate has remained stable.

“Additionally, we understand oversight at the Public Debt Management Office has been bolstered and new debt-management systems have been introduced. We view these factors as supportive of the government’s creditworthiness,” says S&P in latest update.

“Although there have been sparks of discontent very early in the election process, we expect that recent measures aimed at reforming the electoral commission are likely to temper frustrations in the run-up to August 2017 General Election.”

Lenders in the international market rely heavily on credit ratings to determine the pricing of sovereign debt, with private sector borrowing from these markets in turn pegged on the government’s pricing profile.

READ: Ratings agency Moody’s maintains stable outlook for Kenya

Recently, Treasury Cabinet secretary Henry Rotich said Kenya had deferred borrowing from the international market in the first fiscal quarter of the year due to unattractive rates, indicating that potential lenders were indeed demanding a premium to lend to government.

Given the high maturities of domestic debt in the current fiscal year, the government has been forced to borrow heavily in the domestic market in a bid to roll over the debt.

Lower interest rates on government securities due to increased bank demand in the wake of customer loan-rate caps have helped.

At some point during the fiscal year, the government will be forced to look outwards for debt, meaning that the outlook upgrade is good news to the Treasury.

While the country’s credit outlook has been upgraded, S&P has maintained the ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings on Kenya, due to a stable shilling and the expectation of a narrowing current account deficit.

The difference between Kenya’s imports and exports stood at 6.8 per cent of the gross domestic product from 9.8 per cent in 2014 and the Central Bank of Kenya has forecast it could fall further this year to 5.5 per cent, while S&P sees it falling to five per cent.

“Positively, we think that statistical collection deficiencies (particularly underreported services exports) are resulting in an overstatement of Kenya’s current account deficits, alongside potentially underreported financial account flows, including foreign direct investment,” said S&P.

On the risk side, S&P says that it will consider lowering the country’s rating should the budget deficit or government debt increase more than they currently expect, or if financial conditions markedly deteriorate and lead to a significant loss of foreign-exchange reserves.