January 31, 2014 / 5:15 AM / in 4 years

Fitch Affirms Kenya at 'B+'/'BB-'; Outlook Stable

LONDON, January 31 (Fitch) Fitch Ratings has affirmed Kenya's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+' and 'BB-' respectively with a Stable Outlook. Fitch has also affirmed Kenya's Short-term foreign currency IDR at 'B' and Country Ceiling at 'BB-' KEY RATING DRIVERS The affirmation of Kenya's sovereign ratings reflects the following factors: Risks to Kenya’s large current account deficit have moderated over the last six months. The current account deficit, which averaged 10.8% of GDP in 2011 and 2012, was likely to have been overstated by as much as 5% of GDP, according to the IMF. Revised current account data is expected to see a narrowing of the current account deficit, although this may be limited by rising oil-related capital goods imports. As a result, Fitch forecasts a current account deficit of 7.5% of GDP by 2015 - below the current ‘B’ median of 8.4%. Revisions to capital account data suggest less dependence on short-term flows than previously thought. Reserves have also risen to four months of current account payments. Under-spending on capital projects, an on-going challenge for Kenya, is expected to keep the budget deficit contained at 5.3% of GDP for the fiscal year to June 2014 compared with a deficit of 7.9% announced at the time of the budget in June 2013. Spending at county level is also under budget. Debt as a percentage of GDP is forecast to have peaked at 50.3% in 2013, before moderating to 48% in 2015 due to narrower budget deficits. However, medium-term fiscal risks may emanate from the review of the public sector salary structure over the next 18 months as well as from the devolution to the new county system. Growth in 2013 was held back by government under-spending after the March 2013 elections. Kenya’s economy is expected to have grown by 4.8% in 2013, below the government’s expectation of a 5.6% expansion. Despite lower-than-expected growth, the five-year average growth rate is likely to have picked up to 4.9% from 3.8%, above the ‘B’ median. Fitch expects growth to accelerate to 5.3% in 2014, supported by rising domestic consumption on the back of stronger credit growth and remittances. An increase in government spending and a more stable political environment should support infrastructure investment. Economic policy-making has improved since 2011 when excess liquidity in the domestic banking system contributed to sharply rising inflation. This has been reflected in a rise in the World Bank’s Country Policy Institutional Assessment (CPIA), which measures the quality of a country’s policies and institutional arrangements. The CPIA rose to 3.9 in 2012 from 3.6 in 2007 - the highest in sub-Saharan Africa, where the average is 3.2. President Uhuru Kenyatta has established a task force to address the decline in Kenya’s business environment. Kenya’s ranking in the World Bank’s Doing Business Survey has steadily slipped to 31% in 2014 from 48% in 2010. A similar task force successfully drove business reforms prior to 2008. Weak governance remains a constraint on the ratings and has worsened in recent years based on World Bank indices. The trial of President Kenyatta at the International Criminal Court (ICC) seems unlikely to go ahead as witnesses have withdrawn. The trial of Deputy President William Ruto at the ICC could, however, go ahead, opening up the Jubilee Alliance to potential divisions. The new constitution, which devolves power to county level, goes some way towards addressing long-standing regional and tribal tensions. Other constraints on the ratings include per capita income of only one-third of the 'B' median as well as below-peer scores on measures of the business environment and human development. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger negative rating action include: - A further weakening in public finances due to rapid increases in current expenditure, leading to wider budget deficits and a sustained increase in debt - A further widening of the current account deficit, not matched by an increase in long-term financing, would worsen external vulnerability - A further deterioration in the business environment that undermines Kenya's long-term growth potential - A weakening of the macroeconomic policy-making framework The main factors that individually, or collectively, could trigger positive rating action include: - An improved track record of economic management to ensure macroeconomic stability as well as a commitment to curtail current fiscal expenditure and promote fiscal consolidation - Further regulatory reforms in the form of an improved business environment and faster economic growth KEY ASSUMPTIONS Fitch assumes that GDP growth will recover to 6% in the medium term, supported by rising infrastructure investment and the development of the oil sector. No widespread drought is assumed. Fitch assumes political stability with no material adverse effect on international relations resulting from the ICC trials. Contacts: Primary Analyst Carmen Altenkirch Director +44 20 3530 1151 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Richard Fox Senior Director +44 20 3530 1444 Committee Chairperson Douglas Renwick Senior Director +44 20 3530 1045 Applicable criteria, ‘Sovereign Rating Criteria' dated 13 August 2012 and ‘Country Ceilings’ dated 09 August 2013, are available at www.fitchratings.com. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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