Kenya’s high rating under threat, say Moody’s

International credit rating agency, Moody's,  has raised alarm over Kenya's deteriorating security situation saying the country's stable outlook of B1 is under threat.

The agency notes that the fragile security situation in the country is threatening domestic confidence, tourism as well as the country's favourable growth prospects.

According to Moody's, terrorist attacks this year have already hit tourism, which directly and indirectly contributes 13.7 per cent to the Gross Domestic Product (GDP). The sector also employs 12 per cent of the country's workforce, and is Kenya's third-largest earner of foreign exchange, behind tea and horticulture.

In their newsletter, Moody's Monthly dated July 2014, falling tourism-related income and additional security expenditures pose risks to the Government's large fiscal deficit.

"An ongoing erosion of consumer, business and investor confidence risks lower growth, capital inflows and foreign exchange reserves, which would exert downward pressure on the country's B1 rating," says Moody's.

Moody's reckons that since its military intervention in Somalia in October 2011, Kenya has grappled with terrorist incidents within its borders, including the deadly September 2013 Westgate Shopping Mall attack in the capital, Nairobi.

"More than 100 terrorist incidents have occurred within Kenya since 2011, mainly attributed to a retaliatory terror campaign by the Somali militant group, Al Shabaab, in an effort to force the authorities to pull out of Somalia," says Moody's.

On 15-16 June, terrorists killed more than 60 people in two attacks in the coastal town of Mpeketoni and torched hotels, restaurants, banks and government offices.

The number of foreign visitor arrivals has steadily declined to 1.5 million in 2013, up from 1.8 million in 2011.

It is feared that increased spending on security to support tourism and the likely decline in tourism-related tax income will increase the Government's already large fiscal deficit.

According to Moody's, Kenya and the East Africa are fairly resilient to short-term security incidents. "We do not expect to see a significant immediate decline of foreign direct investment (FDI) except for those investments related to tourism, " says Moody's

"Nor do we consider substantial the related risk of a security-induced spike in the cost of servicing Kenya's foreign-currency-denominated debt."

However, Moody's reckon that foreign investors are likely to reconsider their plans should the deterioration in domestic security persist through 2014-15.