Ratio Magazine :: The Inside Track to East Africa’s Economies - Kenya: Press Release: Fitch Changes Kenya Outlook To Stable

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Kenya: Press Release: Fitch Changes Kenya Outlook To Stable

Tuesday, 20 January 2009

London, 16 January 2009: Fitch Ratings today revised the Outlooks on Kenya's Long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Negative. The ratings were affirmed at 'B+' and 'BB-' (BB minus), respectively. The Short-term rating is affirmed at 'B' and the Country Ceiling rating at 'BB-' (BB minus).

"The Stable Outlook reflects the return to stability following the formation of a grand coalition government (GCG), in the wake of disputed elections held in December 2007, which remains intact almost a year later and has put Kenya on the road to recovery," says Veronica Kalema, a Director in Fitch's Middle East and Africa Department. "Though Kenya's recovery is being affected by the global economic slowdown and liquidity crunch, this will delay rather than derail a return to strong growth and Kenya's fundamentals remain supportive of a 'B+' rating."

The impact of the post-election violence has been compounded by the global situation which will slow Kenya's recovery by reducing non-regional exports, tourism, remittances and capital flows for much needed investment. After a contraction by 1% y-o-y in Q108, growth recovered to 3.4% in Q208, before easing to 2.1% in Q308. Fitch estimates that Kenya's growth slowed to around just 2% for 2008 as a whole, down from 7% in 2007. The agency, nonetheless, believes that Kenyan growth will improve in 2009, supported by strong regional and domestic demand and a recovery of agriculture to around 4-5%.

Public finances proved resilient to the country's political crisis. The deficit in FY08 (July 2007-June 2008) came in at 3.5% of GDP, below the projected 5.3% of GDP, reflecting strong revenue growth in the lead-up to the crisis, while reduced capital spending offset increased spending on security. The public debt ratio continued to decline to 43% of GDP from as high as 63% in FY04, although this is higher than the 29% of GDP median for the 'B' category, where many countries, unlike Kenya, have been beneficiaries of debt relief. Deficits are projected to widen due to increased infrastructure investment which is positive for longer-term creditworthiness, but means that debt ratios will decline more gradually going forward. In FY09 the planned Eurobond issue is unlikely to go ahead due to tight global credit markets. This will delay some planned infrastructure spending, and lower the deficit to around 4% of GDP compared with a budgeted 5.5%.

Up until 2007 the widening current account deficit (CAD) was financed by increased capital inflows, including record FDI in 2007. However, in 2008, net capital flows were insufficient to finance the further widening caused by higher oil prices and lower tourist receipts. Balance of payments (BOP) pressures worsened in Q408 due to the withdrawal of capital by foreign investors, resulting in a fall in reserves and the KES. These have since stabilised. In 2009, despite a narrowing of the CAD, mainly due to lower oil prices, BOP pressures may continue, due to limited access to finance and lower remittances. This would increase macroeconomic risks. Successfully navigating the economy through the adverse global environment - by sustaining growth and keeping inflation in check - would be important to maintain the current rating. Kenya has had a poor recent inflation record. Inflation shot up in 2008 and averaged 26%. However, it is expected to fall substantially in 2009 due to methodological changes, a fall in fuel prices and normalisation of domestic food supplies.

Gross external debt (GXD) and net external debt ratios have declined steadily and GXD ratios are stronger than the medians of the 'B' and more or less in line with 'BB' credits. However, these are now expected to stabilise rather than continue a downward trend due to a rise in borrowing for infrastructure spending and the recent fall in official reserves.

The GCG has held together in the past year. However, the real test will come as it deals with underlying issues that caused the post-election violence - constitutional and electoral reform - as well as land reforms issues. Any progression up the rating scale will depend on addressing these issues so as to prevent a cycle of instability with future elections. Conversely, an unravelling of the GCG - which, though not Fitch's central assumption, is a risk as it starts addressing these issues - would lead to negative rating action. There has been some progress, with a Constitution Amendment Bill passed in December 2008 that officially disbanded the electoral commission of Kenya (ECK) and which enables the country to embark on constitutional review. Additionally in December, the President and Prime Minister signed off an agreement to implement an internal tribunal as recommended by the Waki report, to bring to account those involved in the post-election violence.

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