Fiscal deficits, politics raise Kenya’s credit risk

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Kenya’s credit worthiness is facing a possible downgrade in the next one year due to a rising budget deficit and political temperatures ahead of next year’s general election.

Global ratings agency Standard & Poor’s said in early August the country’s sovereign credit rating is likely to drop to ‘B’ from the current ‘B+’ with a negative outlook. This could worsen if Kenya’s external liquidity or financial conditions markedly deteriorate leading to a significant reduction in foreign exchange reserves – presently at $7.78 billion (about Sh788.97 billion) – and widening external financing gap. This financial year the government plans to borrow about Sh675 billion, comprised of Sh450 billion foreign debt and Sh225 billion domestic, to bridge the gap in the budget.

“The negative outlook reflects our view that there is at least a one-in-three possibility that we could lower our ratings on Kenya in the next six to 12 months,” S&P associate director Benjamin Young said during the firm’s Rising Credit Risks in Kenya seminar in Nairobi.

“We could lower the ratings if Kenya’s fiscal deficits were to increase further or if debt increased more than we currently expect. We could also lower the ratings if political tensions flare up and undermine stability-oriented economic policymaking.”

The government can, however, reverse the outlook by supporting policies on predictable and improving public finances, particularly expenditure controls and funding sources, and through sustained improvement in the external accounts, S&P said.

Managing director Konrad Reuss warned lower rating could reduce investor appetite for Kenya, which remains the hub for investments into the East African Community bloc.

“There is need to strengthen economic performance, labour markets among other key areas,” Reuss said.

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