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Ratings agency: Kenya’s risk of defaulting on credit moderate

BUSINESS
By Patrick Alushula | February 16th 2016

International ratings agency Moody’s has maintained Kenya’s credit outlook at stable.

The firm based the rating on the country’s growth potential and narrowing current account deficit.

The rating, which is in line with what Moody’s issued last year, puts Kenya at the B1 level, meaning the country’s ability to service its obligations is relatively stable, with chances of default being moderate.

However, this rating contradicts that of New York-based firm Standard & Poor. In October last year, the agency lowered Kenya’s credit rating outlook from stable to negative, citing elevated risks from currency depreciations and a widening Budget deficit.

It had predicted a mounting debt stock due to the country’s low fiscal position, which it said could increase exposure to external shocks.

In July, a similar move had been taken by another agency — Fitch Ratings. Fitch also pointed at worsening public spending habits and a widening current account deficit in its downgrade of Kenya’s long-term external borrowing outlook from stable (B+) to negative (BB-).

A current account deficit refers to the difference between the value of a country’s imports and its exports.

But according to Moody’s, Kenya is making strides in reducing its current account deficit, as well as reducing public spending. With oil prices touching a 12-year low, the agency notes the country is already cutting its expenditure on imports.

Based on this, the agency projects a narrowing fiscal and current account deficit in the coming years.

“Kenya’s sizeable fiscal and current account deficits will begin narrowing from the 2016-17 financial year over the next three years, as policymakers pursue a contractionary stance of fiscal policy,” it said.

Infrastructure Projects

The Government has announced plans to cut its spending by about Sh70 billion in the current financial year ending June, as it seeks to reduce the Budget deficit.

And with many large infrastructure projects nearing completion, Moody’s said the spending cuts will focus more on recurrent expenditure.

Kenya will also have many opportunities in the coming years as economic integration continues to take shape in East Africa, it added.

The firm projects the country’s growth domestic product (GDP) will increase by 5.5 per cent in 2016 and rise to 6 per cent by 2018.

This will be on the back of the gains expected from the completion of key infrastructure projects, such as the standard gauge railway.

“We expect the current account deficit to narrow from 9.5 per cent of GDP in 2015 to around 6.7 per cent of GDP over the next three years, supported by the positive terms of trade and the decline in capital imports related to infrastructure projects,” noted Moody’s.

However, it cautioned that a continuation or escalation in insecurity, or renewed political instability could dampen economic growth and put downward pressure on Kenya’s rating.

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