Fitch Affirms Kenya at ‘B+’, Outlook Stable

Posted on August 6, 2012


Fitch Affirms Kenya at ‘B+’, Outlook Stable Ratings Endorsement Policy
06 Aug 2012 9:22 AM (EDT)

Fitch Ratings-London-06 August 2012: Fitch Ratings has affirmed Kenya’s Long-term foreign currency Issuer Default Rating (IDR) at ‘B+’ and local currency rating at ‘BB-‘ with Stable Outlooks. The agency has also affirmed the Short-term rating at ‘B’ and Country Ceiling at ‘BB-‘.
A stringent dose of monetary policy has helped restore macroeconomic stability during 2012. Large twin deficits, combined with strong credit growth, rapid inflation and a sharp depreciation of the exchange rate raised serious doubts about macroeconomic stability during 2011. Volatility was exacerbated by the slow response of monetary policy.

Inflation reached a peak of 19% in November 2011, but had declined to 10% in June 2012. Headline inflation is expected to average 10% during 2012. Annual credit growth also abated to 23% in April 2012, down from 36% in Q411. Higher interest rates and measures to limit speculation in the currency market helped to restore stability in the shilling, which plunged 25% in the first nine months of last year. Reserves are now rising again.

Economic prospects remain favourable as the impact of the drought on agriculture and energy generation abates. The recovery in agricultural and manufacturing, combined with still strong growth in construction, should push growth above 5% in 2012. However, the current account deficit remains a source of vulnerability.

The current account deficit is high in comparison with Kenya’s ‘B’ rated peers and extremely vulnerable to domestic climatic conditions, global commodity prices and growth in major export destinations. Export earnings only cover 40% of the import bill, which can experience large swings as oil makes up 30% of imports. Exports’ vulnerability to unfavourable weather conditions exacerbates the exposure to international fuel price volatility as reliance on diesel fuel imports for thermal power generation increases at the same time.

The government will maintain a fiscal stimulus in FY2012/13 to boost economic growth, but Fitch expects it to tighten the fiscal stance somewhat to keep debt in check during the next fiscal year. The FY2012/13 budget reflects rising outlays on infrastructure and public-sector wages, although these will be partly offset by a higher tax take. To contain the debt burden, fiscal consolidation will need to become a priority next year with key debt ratios already above the ‘B’ median. The debt to GDP ratio remains high at 45% in FY2011/12 up from 42% FY2009/10, compared with the ‘B’ median of 37%. The higher debt burden is mitigated by greater fiscal flexibility due to a more developed local bond market. However, sharply higher borrowing costs due to limited demand from banks and risk-averse international investors has made financing the deficit locally very expensive at times.

Political risk continues to weigh on Kenya’s investment environment, given the scale of post-election violence in early 2008 and continuing tensions. A constitutional referendum in August 2010 went smoothly, but the implementation of some of the contentious issues may yet cause some tensions. The trial of alleged key instigators of the 2007 election-related violence and the upcoming elections in March 2013 will weigh on political risk in the short term.

The authorities will need to demonstrate the ability to use more timely and responsive economic policy to mute the impact of exogenous shocks on the economy. Increased volatility in GDP, due to inadequate policy responses, would put downward pressure on the rating. In addition, fiscal consolidation will need to become a priority next year, given the risk of eroding debt dynamics and with key debt ratios already above the ‘B’ median. Improving governance and the business environment will become increasingly important, as Kenya risks slipping further behind more dynamic rating peers.

Fitch will closely monitor conditions in the run up to the elections and the immediate aftermath. An outbreak of violence on the scale seen during 2007 would lead to negative rating action. In contrast, continued stability which had a favourable impact on the business and investment climate would bolster creditworthiness.

Primary Analyst
Carmen Altenkirch
+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

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:

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