By Modupe Gbadeyanka
Renowned global rating agency, S&P Global Ratings, on April 7, 2017, affirmed its ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings on Kenya with the outlook stable.
The agency explained that its ratings on Kenya were supported by its monetary flexibility, liquid domestic financial markets, track record of strong headline and per capita GDP growth, and increasingly diversified economic base.
In March 2016, Kenya signed a new stand-by agreement with the International Monetary Fund (IMF), totalling $1.5 billion over the next 18 months, which would support external financing needs if necessary.
S&P stated that it believes the arrangement will likely act as a policy anchor while it is in force, pointing out that it ratings on Kenya were constrained by the country’s history of ethnic tensions, low GDP per capita and wealth levels, high government fiscal deficits and debt stock, and susceptibility to balance-of-payments pressures.
Since 2014, the lion’s share of Kenya’s net external financing needs has been provided by official rather than commercial lenders.
In 2017, the agency expects the Kenyan economy to grow at 5.3%, slower than the estimated 6 percent in 2016.
Higher oil prices, drought conditions in the Rift Valley, and weaker credit growth (reflecting the government’s introduction of interest rate caps) will weigh on the economy this year; as will the approach of elections in August 2017, if tensions between political parties and along ethnic lines escalate.
“In the medium term, Kenya’s economic growth prospects remain strong, averaging 6% per year over 2018-2020 reflecting a diversified economic base, a resilient tourism sector, and productivity gains from large-scale public infrastructure investments, alongside Kenya’s favourable demographics,” S&P said.
It stated further that large infrastructure projects like the Standard Gauge Railway ($4 billion) have boosted economic activity.
The first phase of the Standard Gauge Railway project has been completed and is undergoing tests before commissioning during 2017. The project seeks to connect Kenya, from the port of Mombasa, with the capital Nairobi and the neighbouring Republic of Uganda.
“We estimate Kenya’s fiscal deficit in 2016-2017 will remain elevated, at close to 10% of GDP, owing to increases in one-off expenditure items related to the elections and drought support spending. This is one of the highest budgetary deficits of all rated sovereigns.
“At the same time, there are still shortfalls in personal and corporate income taxes while capital expenditure implementation lags budget targets. Absent one-off factors experienced in 2016-2017, we expect that large infrastructure-related expenditures will start to decline and that the government will undertake consolidation measures, including improving tax collection.
“We expect fiscal imbalances will reduce more gradually and average close to 6% of GDP in 2017 and close to 4% by 2020.
“We also understand that oversight at the Public Debt Management Office (PDMO) has been bolstered and new debt-management systems have been introduced. We view these factors as supportive of the government’s creditworthiness,” the agency said.
S&P disclosed that the stable outlook reflects its expectation that strong growth prospects will facilitate fiscal consolidation and contain increases in external indebtedness over the next year.
“We could lower the ratings if political tensions flared up and undermined stability-oriented economic policy-making, or if fiscal consolidation were markedly slower and increased government debt or the country’s external private sector debt increased more than we currently expect,” it added.
Adedapo Adesanya