- Upcoming elections, drought, and decelerating credit growth pose short-term risks to Kenya’s 2017 economic growth and budgetary performance.
- Over the longer term, however, we consider Kenya’s economic growth prospects remain strong, underpinning our projections of gradual fiscal consolidation of still-high public deficits.
- We are therefore affirming our ‘B+/B’ ratings on Kenya.
- The stable outlook reflects our expectation that, commencing next year, government debt as a percentage of GDP will start trending downward, and per capita GDP growth will recover to above 3% per year.
On April 7, 2017, S&P Global Ratings affirmed its 'B+/B' long- and short-term
foreign and local currency sovereign credit ratings on Kenya. The outlook is
Our ratings on Kenya are 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, the
government signed a new stand-by agreement with the International Monetary
Fund (IMF), totaling $1.5 billion over the next 18 months, which would support
external financing needs if necessary. We believe that the arrangement will
likely act as a policy anchor while it is in force.
Our ratings on Kenya are 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, we expect the Kenyan economy to grow at 5.3%, slower than the
estimated 6% 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 favorable
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 neighboring Republic of Uganda. We expect that the
railway will attract private-sector investment along a new and important
regional trade corridor. Potential oil production could also lift economic
growth, although we view this as a long-term prospect, beyond our forecast
horizon. Tourism's contribution to economic growth remains subdued after
terrorist attacks in the past few years, which could deter investors and
tourists. We estimate wealth levels, measured by GDP per capita, at $1,600 in
2017, while real GDP per capita growth will average 3% over 2017-2020. We
expect strong economic growth performance will also underpin fiscal
consolidation efforts and that government and external debt will stabilize
close to or at current levels.
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.
We estimate that Kenya's high stock of debt will average 54% of GDP over
2017-2020 on a net basis, while interest payments will also remain above 15%
of revenues over the same period. While Kenya's debt stock is high, nearly
half of the external debt is from multilateral creditors, while another third
is from bilateral creditors. Commercial debt has increased in recent years,
with Eurobond issuances at about $3 billion in 2014 followed by a loan
syndication of $750 million maturing this year. We expect the maturing loan
syndication to be refinanced in the same way in the near term.
Current account deficits are narrowing close to 5% of GDP over 2017-2020
compared with at least 8% of GDP over 2012-2015. The narrowing deficit is
being supported by higher economic growth; lower import volumes and stable
tourism receipts; as well as stable tea, coffee, and horticulture exports,
which contribute at least 50% of export receipts and strong remittances from
abroad. The funding, however, is volatile and relies largely on a combination
of mostly official external debt and inward foreign direct investment (FDI).
In 2016, inward FDI fell below 1% of GDP from almost 2% in 2014-2015, leaving
the rest of the financing to external borrowing. External borrowing by both
the public and private sector has increased in recent years, resulting in our
estimates of narrow net external indebtedness to current account receipts
(CARs) and gross external financing needs to CARs plus usable reserves both
remaining above 100% over 2017-2020.
Kenya does not produce stock data for private sector external debt, which
makes it difficult to measure accurately the extent of private sector external
debt. The balance of payments data in 2015 and 2016 also shows errors and
omissions of close to 2% of GDP, suggesting potential classification errors.
We believe that the efforts by Kenya National Bureau of Statistics in
conducting the 2016 Foreign Investment Survey will be integrated into revised
2016 Balance of Payments data and an International Investment Position dataset
will be published for the first time in May 2017. Should the external
environment become difficult to access due to changes in global liquidity or
uncertainties associated with domestic elections, we believe that the recently
signed stand-by arrangement with the IMF would act as a financing cushion.
The central bank of Kenya follows a floating exchange rate system. The Kenyan
shilling depreciated against the U.S. dollar in 2014 and 2015 by over 10%
cumulative before stabilizing last year in line with the gradually narrowing
external deficits. We expect that the shilling will remain stable over
2017-2020. The drought in the Rift Valley is weighing on food prices and
inflation in 2017, which we expect to average 9%. In 2018, however, we expect
the central bank will be able to maintain inflation closer to its 5% target
range (our forecast is 6%). While the banking sector is small, with banking
sector gross assets at 70% of GDP, there are pressures on some banks'
profitability, asset quality, and capitalization levels. Since November 2016,
when the Banking Amendment Act took effect, which caps lending rates by banks,
credit growth has significantly slowed to less than 5% as banks have become
more risk averse, and nonperforming loans have deteriorated to about 10% in
February 2017, from 6.5% a year earlier. The law to cap banks' lending rates
could have wide-ranging effects on monetary policy transmission mechanisms,
from policy rates to the commercial banking sector.
Kenya operates a functioning parliamentary democracy that engages in national
debate over key policy issues, but which has also witnessed significant
election-related ethnic violence in the past. The country faces an upcoming
general election in August 2017 with parties formed along ethnic lines.
Electoral amendments passed by the senate in January 2017 have been criticized
by opposition parties, as they are perceived to not address the key issues
that could lead to disputed election results. However, although there have
been sparks of discontent very early in the election process, we expect that
tensions will be broadly kept in check.
Recent attacks by insurgency groups continue to pose security risks that could
impact economic growth. That said, we note that, more recently, these attacks
have been concentrated in the north of the country, away from the main tourism
areas and business infrastructure.
The stable outlook reflects our 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.
We could raise the ratings if we see prospects for sustained political and
economic stability, including declining budgetary imbalances, supported
particularly by expenditure control, alongside sustained improvement in
Kenya's external accounts.
|Republic of Kenya Selected Indicators|
|ECONOMIC INDICATORS (%)|
|Nominal GDP (bil. KES)||3,726||4,261||4,745||5,398||6,224||7,126||7,916||8,936||10,098||11,410|
|Nominal GDP (bil. $)||42||50||55||61||63||69||76||85||96||107|
|GDP per capita ($000s)||1.0||1.2||1.3||1.4||1.4||1.5||1.6||1.7||1.9||2.0|
|Real GDP growth||6.1||4.6||5.7||5.3||5.6||6.0||5.3||6.0||6.0||6.0|
|Real GDP per capita growth||3.3||1.8||2.9||2.6||2.9||3.3||2.6||3.3||3.3||3.3|
|Real investment growth||4.8||12.7||1.2||14.8||5.2||5.5||5.0||5.6||5.7||5.6|
|Real exports growth||9.2||(0.2)||0.5||5.3||(0.9)||5.2||4.0||4.5||4.5||4.5|
|EXTERNAL INDICATORS (%)|
|Current account balance/GDP||(9.1)||(8.4)||(8.8)||(9.8)||(6.8)||(5.4)||(5.4)||(5.3)||(5.2)||(5.3)|
|Current account balance/CARs||(29.5)||(29.3)||(33.5)||(39.1)||(30.3)||(25.6)||(25.9)||(26.1)||(26.4)||(27.8)|
|Net portfolio equity inflow/GDP||(0.1)||0.5||0.5||1.5||0||(0.3)||0.2||0.2||0.2||0.2|
|Gross external financing needs/CARs plus usable reserves||113.5||120.7||121.9||126.1||117.3||122.0||123.9||127.0||125.9||130.1|
|Narrow net external debt/CARs||51.9||53.9||73.8||77.2||113.7||112.1||122.2||122.9||120.6||118.8|
|Net external liabilities/CARs||20.1||25.0||47.7||56.2||90.6||89.8||111.2||122.4||129.5||137.0|
|Short-term external debt by remaining maturity/CARs||21.8||27.1||36.5||41.3||52.0||59.2||59.5||61.1||54.5||55.0|
|Usable reserves/CAPs (months)||3.1||2.7||3.6||3.7||5.1||4.9||4.7||4.5||4.1||3.8|
|Usable reserves (mil. $)||4,265||5,712||6,599||7,911||7,548||7,879||8,229||8,220||8,277||8,443|
|FISCAL INDICATORS (%, General government)|
|Change in debt/GDP||5.4||5.9||11.8||7.8||12.4||8.2||6.1||6.0||5.5||4.5|
|MONETARY INDICATORS (%)|
|GDP deflator growth||10.8||9.4||5.4||8.0||9.1||8.0||5.5||6.5||6.6||6.6|
|Exchange rate, year-end (KES/$)||85.07||86.00||86.31||90.50||102.31||103.00||104.50||105.00||106.00||106.50|
|Banks’ claims on resident non-gov’t sector growth||31.3||11.8||18.2||22.8||17.3||6.0||8.0||13.0||13.0||13.0|
|Banks’ claims on resident non-gov’t sector/GDP||32.9||32.2||34.2||36.9||37.5||34.7||33.7||33.8||33.8||33.8|
|Foreign currency share of claims by banks on residents||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A|
|Foreign currency share of residents’ bank deposits||19.1||16.5||18.4||16.6||17.6||16.5||16.5||16.5||16.5||16.5|
|Real effective exchange rate growth||(5.3)||17.2||3.9||4.5||5.8||3.8||N/A||N/A||N/A||N/A|
RATINGS SCORE SNAPSHOT
|Republic of Kenya Ratings Score Snapshot|
|Key rating factors|
|Fiscal assessment: flexibility and performance||Weakness|
|Fiscal assessment: debt burden||Weakness|