'Poll spending may lower Kenya’s rating'

Kenya may have its sovereign credit rating cut by one level because of the nation’s fiscal deficit, S&P Global Ratings’ Financial Services Director Neil Gosrani said.

“The negative outlook means the rating would go to B flat,” Gosrani told reporters in Nairobi. The likelihood of excessive spending on elections scheduled for August 2017 will raise more red flags, he said.

Kenya budgeted for a deficit of 8.7 per cent of gross domestic product for the fiscal year through June 2016 from 7.8 per cent a year earlier, mainly on account of spending on a new railway linking the capital to the port city of Mombasa. Treasury expects to see the shortfall narrowing to 6.9 per cent in the year beginning July 1.

The ratings company said it expects the nation will attract higher interest rates when it sells a second Eurobond. Kenya’s debut 10-year sovereign paper sold at 6.88 per cent in 2014.

Yields on the notes maturing in June 2024 dropped two basis points to 8.31 per cent in London. Treasury Secretary Henry Rotich has said the $61 billion (Sh6.16 trillion) economy will ask foreign investors for more money before the end of 2016, after raising $2.82 billion (Sh284 billion) in 2014.

“There’s going to be a risk-premium increase,” S&P Financial Services Ratings Director Matthew Pirnie said of any future issues.

Kenya may require Sh2.15 trillion for government expenditure in the 2016-17 fiscal year, according to budget estimates. It planned gross spending of Sh2.26 trillion in the current financial year.

The shilling weakened 0.2 per cent to 100.85 against the dollar at close of trade last Friday.

The credit ratings of African nations have fallen in the past two years because of a decline in commodity prices, particularly oil, weak global growth, reduction in credit quality and an increase in defaults, Gosrani said. “Two years ago, the ratings would be higher or the outlook would be stable,” he said.

In April, S&P affirmed Kenya ratings at ‘B+/B’ and put the outlook at negative. The ratings agency said Kenya continues to have elevated external vulnerabilities linked to exchange rate depreciation. Negative outlook reflects the view that there is at least a one-in-three possibility that Kenya’s ratings could be lower in the next 6-12 months.

While in Nairobi last week, Analysts from S&P Global Ratings briefed Heads of Kenya’s top-tier banks and insurers in a forum aimed at educating the sectors on the use of ratings and how its criteria is applied to the Kenyan financial services sector.

Gosrani said, “Credit ratings may play a useful role in enabling corporations and governments to raise money in the capital markets. Investors and other market participants also use ratings as a screening device to match the relative credit risk of an issuer or individual debt issue with their own risk tolerance or credit risk guidelines in making investment and business decisions.”