Reviews & Outlooks | |
Reviews & Outlooks | |
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Wednesday, February 14, 2018 /08:30 AM / Moody’s
Investors Service
Moody's Investors Service ("Moody's") has today downgraded the
issuer rating of the Government of Kenya to B2 from B1 and assigned a stable
outlook. This concludes the review for downgrade that commenced on October 2,
2017.
The drivers of the downgrade relate to an erosion of fiscal metrics and
rising liquidity risks that point to overall credit metrics consistent with a
B2 rating. The fiscal outlook is weakening with a rise in debt levels and
deterioration in debt affordability that Moody's expects to continue. In turn,
large gross financing needs and reliance on commercial external debt will
maintain government liquidity pressures. While the government aims to improve
the efficiency of spending and revenues, such measures are unlikely to be
effective enough to stem a weakening in fiscal trends.
At B2, risks are balanced, and supportive of a stable outlook. Kenya
retains strong fundamental economic strengths with a relatively diversified
economy that holds strong growth potential. Moreover, Kenya has a relatively
deep capital market and mature financial sector, which affords the government
some capacity to issue domestically in local currency and with longer tenors.
Concurrently, Moody's has lowered the long-term foreign-currency bond
ceiling to Ba3 from Ba2 and the long-term foreign-currency deposit ceiling to
B3 from B2. Moody's has also lowered the long-term local-currency bond and
deposit ceilings to Ba2 from Ba1.
Ratings Rationale
Rationale for Downgrade to B2
Erosion of Fiscal Strength Due to A Rise In Debt Levels And
Deterioration In Debt Affordability
Moody's expects Kenya's fiscal metrics to continue deteriorate, as large
primary deficits combine with worsening debt affordability and rising debt
levels.
Moody's forecasts government debt to increase to 61% of GDP in fiscal
year 2018/19 (the year ending in June 2019), from 56% of GDP in FY 2016/17 and
41% of GDP in FY 2011/12. Large infrastructure-related development spending
needs combined with subdued revenue collection and a rising cost of debt will
result in large fiscal deficits and keep government debt on an upward trend.
Moody's expects the primary deficit to remain above 4.0% of GDP over the next
two years, after 5.3% of GDP in FY 2016/17.
Debt affordability is deteriorating as reflected by the increase in
government interest payments as a share of revenue to 19% in FY2017/18, from
13.7% in FY2012/13. We expect a further rise to 20% in 2018. Kenya's government
external debt, which stood at 31.6% of GDP as of June 2017, continues to shift
away from concessional debt toward commercial and semi-concessional debt,
leading to higher financing costs. Between June 2013 and June 2017, the share
of commercial external debt increased from 7% to 31% of total external debt. An
increase in the stock of short-term domestic debt as a percentage of GDP also
contributes to a rising interest burden.
Structural fiscal reform will be key to approaching the government's
ambitious medium-term objectives of fiscal consolidation and strengthening
fiscal resilience, but are unlikely to have a material nearer-term impact on
fiscal performance.
Efforts to streamline and modernize public spending can result in
improvements in efficiency, which would create fiscal space for development
spending or to limit fiscal imbalances. Kenya's expenditure reform plans
include 'zero-based budgeting' to reduce wasteful spending, better management
of the public wage bill, and increased planning and budgeting of public
investments.
The Kenyan Treasury also plans to focus on improving the efficiency of
tax collection and compliance by increasing the capacity of the Kenyan Revenue
Authority, rolling out IT-related measures to reduce undervaluation of taxable
income and concealment of imports, and expanding the tax base through targeted
measures aimed at the informal sector of the economy.
Although the government aims to reduce the size of the fiscal deficit,
given a mixed track record in terms of implementation of fiscal consolidation
and demands for development and social spending on the government's budget,
effective fiscal consolidation is likely to be slower than the government
envisages and unlikely to be sufficient to reverse the deterioration in fiscal
strength.
Rising Government Liquidity Risk
The government will continue to face liquidity pressures due to a
combination of large financing needs and an increased reliance on sources of
financing with less predictable costs, in particular commercial external
borrowing and short-term domestic debt. Financing needs will increase to high
levels compared with other sovereigns, at around 22% of GDP by FY 2018/19,
having reached 19% of GDP in FY 2016/17.
The risk of financing stress will increase as more commercial external
borrowing, denominated in foreign currency, begins to mature over the next few
years, particularly in an environment of rising global interest rates and a
number of sub-Saharan African sovereigns seeking refinancing at the same time.
Kenya's first Eurobond payment of $750 million (1% of forecast GDP) is due in
June 2019, followed by a second $2 billion Eurobond maturing in 2024. A
syndicated loan originally taken out in 2015 and worth $750 million was
extended by six months in October 2017, with 90% of investors agreeing to
extend the maturity to April 2018.
The increase in short-term domestic debt, to 9.4% of GDP at the end of
FY 2016/17 from 3.3% of GDP five years earlier, will also test the capacity of
the government to roll over a large stock of debt on the domestic market at
moderate costs.
Rationale for Stable Outlook
The stable outlook reflects the broadly balanced credit pressures at the
B2 rating level.
Kenya's economic strength is supported by a relatively diversified
economy with high growth potential at around 6.0-6.5%, which provides some
capacity to absorb economic shocks. In turn, a relatively stable economy limits
the risk of a sudden slump in the government's revenue base.
Moreover, Kenya has a relatively deep capital market and mature
financial sector, which affords the government some capacity to issue
domestically in local currency and with longer tenors -- alongside short-term
debt issuance. We estimate that the average maturity of outstanding domestic
bonds with an initial maturity of more than 364 days stood at 7 years in August
2017. Furthermore, liquidity pressures are somewhat mitigated by the central
government's deposits within the domestic banking sector, estimated at 6% of
GDP at the end of FY 2016/17, which could be used as a financing source in case
of need.
Factors That Could Lead to An Upgrade
The effective implementation of structural fiscal reforms to narrow the
fiscal deficit, which would stabilize and eventually reduce the debt burden,
improve debt affordability and reduce liquidity risks would put upward pressure
on Kenya's rating.
Factors That Could Lead to A Downgrade
Downward pressure on the rating would emerge if fiscal slippage were to
lead to a more rapid increase in the debt burden than Moody's currently
expects. A sustained increase in borrowing costs, denoting more intense
liquidity pressure than Moody's assesses, would also put downward pressure on
Kenya's credit metrics and rating.
GDP per capita (PPP basis, US$): 3,540 (2017 Actual) (also known as Per
Capita Income)
Real GDP growth (% change): 4.7% (2017 Actual) (also known as GDP
Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.5% (2017 Actual)
Gen. Gov. Financial Balance/GDP: -8.9% (2016-17 Actual Fiscal Year)
(also known as Fiscal Balance)
Current Account Balance/GDP: -6.1% (2017 Actual) (also known as External
Balance)
External debt/GDP: 30.0% (2017 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has
been recorded since 1983.
On 08 February 2018, a rating committee was called to discuss the rating
of the Kenya, Government of. The main points raised during the discussion were:
The issuer's fiscal or financial strength, including its debt profile, has
materially decreased. The issuer has become increasingly susceptible to event
risks.
The principal methodology used in this rating was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
Regulatory Disclosures
For ratings issued on a program, series or category/class of debt, this
announcement provides certain regulatory disclosures in relation to each rating
of a subsequently issued bond or note of the same series or category/class of
debt or pursuant to a program for which the ratings are derived exclusively
from existing ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain regulatory
disclosures in relation to the credit rating action on the support provider and
in relation to each particular credit rating action for securities that derive
their credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and in relation to
a definitive rating that may be assigned subsequent to the final issuance of
the debt, in each case where the transaction structure and terms have not
changed prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the ratings tab on
the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action, and whose
ratings may change as a result of this credit rating action, the associated
regulatory disclosures will be those of the guarantor entity. Exceptions to this
approach exist for the following disclosures, if applicable to jurisdiction:
Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the
credit rating and, if applicable, the related rating outlook or rating review.
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