Fitch Affirms Kenya at 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON/PARIS, January 23 (Fitch) Fitch Ratings has affirmed Kenya's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+' and 'BB-', respectively, with Stable Outlooks. Fitch has also affirmed Kenya's Short-term foreign currency IDR at 'B' and Country Ceiling at 'BB-'. The issue ratings on Kenya's senior unsecured foreign currency bonds have also been affirmed at 'B+'. KEY RATING DRIVERS The affirmation of Kenya's sovereign ratings reflects the following key rating drivers: Kenya's public finances have loosened steadily over the past decade. The Ministry of Finance has announced that it now forecasts a deficit of 8.7% of GDP for FY15, up from 7.4% (or 6.2% of re-based GDP) announced at the time of the budget in June 2014. The revision is due to spending on a single-gauge railway project, which is estimated to cost USD3.8bn (or 5.5% of GDP) as well as revenue underperformance. Fitch expects a deficit of 7.8% of GDP for FY15, due to on-going challenges associated with implementing large-scale infrastructure projects. Widening fiscal balances have pushed the debt-to-GDP ratio above the 'B' median. Fitch expects government debt to rise to 51.2% of GDP by FY16, from 43.3% in FY13 and 36.9% in FY08. The increase reflects significant new debt incurred to fund infrastructure as well as a steady loosening in fiscal policy since the global financial crisis. While current debt levels are not unsustainable, Fitch highlights the risk of increased reliance on commercial debt, high carry costs if shovel-ready projects are not available, as well as repayment risk posed by large issue sizes. Parliamentary approval was granted in December 2014 to raise Kenya's external debt ceiling to USD27bn (or 43% of GDP) from USD13bn, which would otherwise have been breached by the end of the year following eurobond issuance of USD2.75bn. A precautionary credit facility providing Kenya with access to IMF resources in the event of exogenous shocks, is expected to be sealed by end-1H15. The positive impact of lower oil prices on the current account will be offset by rising capital imports, particularly for the new railway network. Oil made up 24% of imports in FY14.The current account deficit is expected to widen to 8% of GDP in FY15 from 7.6% in FY14. Increased government borrowing and foreign direct investment, particularly into the oil sector, will help fund the current account deficit. Security in Kenya remains a significant risk and will continue to adversely impact tourism. Kenya has recorded over 135 attacks, for which Al-Shabaab has claimed responsibility, since military operations began in Somalia in 2011. The government's largely military response does not address underlying social challenges and risks marginalising Somali and Muslim communities, creating additional scope for Al-Shabaab to expand its local recruitment networks. Kenya's rebased GDP, released in September 2014, showed an economy that was 20% larger, more dynamic and more resilient. Five-year average growth has been revised to 5.8%, compared with 5% previously, due to stronger growth in construction, agriculture and domestic trade. Fitch expects large-scale infrastructure projects in power and rail to boost growth above 6%. However, terrorist activity and its adverse impact on the tourism industry will curtail even faster growth. Kenya's ratings are constrained by weak per capita GDP, which is one-third of the 'B' median. The country is in the 22nd percentile of the UN Human Development Index. Kenya's social and governance indicators are weaker than the 'B' median. A weak business environment is harming competitiveness and foreign direct investments. Kenya's World Bank Doing Business Index ranking slipped to below the 'B' median in 2013. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently well-balanced. The main factors that could, individually, or collectively, trigger negative rating action include: - A substantial weakening in public finances relative to peers, especially related to rapid increases in current expenditure - A sharp widening of the current account deficit, not matched by an increase in long-term financing, which would increase external vulnerability - A marked deterioration in the political environment and security undermining Kenya's long-term growth performance - A weakening of the macroeconomic policy-making framework The main factors that could, individually, or collectively, trigger positive rating action include: - An improved track record of economic management to ensure macroeconomic stability - Effective implementation of a fiscal consolidation plan - Further regulatory reforms to foster an improved business environment and faster economic growth KEY ASSUMPTIONS Fitch assumes that GDP growth will recover to about 6% on average in the medium term, supported by rising infrastructure investment and the development of the oil sector. No widespread drought is assumed. Fitch assumes a basic degree of political stability is maintained.