Stable Outlook Reflects Agency Expectation Of Growth
Global rating agency SP Global last month places the sub-Saharan nation of Kenya at “stable” while reaffirming the sovereign at “B+/B.”
“We could lower the ratings if the country’s external position weakens more than expected, for example, due to higher current account deficits, and consequently a faster increase in external debt, or due to a decline in Kenya’s external buffers in the absence of an International Monetary Fund (IMF) program,” the agency said in a statement. “We could also consider lowering the ratings if Kenya were to backtrack on its reform efforts (in the absence of IMF conditionalities) on taxes and removing lending rate caps, hampering fiscal consolidation and economic performance. ”
The agency’s rationale behind the move on Kenya was supported by “its track record of reasonably strong headline and per capita GDP growth,” coupled with the country’s increasingly diversified economic base relative to peers in the region, according to the agency.
Kenya, says SP Global, also benefits from what are deeper domestic capital markets than regional peers; close to 45 percent of the general government debt stock is denominated in locally, with local currency debt market capitalization estimated at 25 percent of GDP at end-December 2017.
“We believe Kenya’s institutions are improving”
Court rulings during the last election season show a relatively independent judiciary, providing evolving checks and balances to other arms of the government, which sets Kenya apart from peer countries in the region. The government’s executive branch is pursuing politically sensitive economic reforms that enhance tax revenues and private-sector credit growth, despite some pushback from the legislative branch. Kenya’s political tensions have drastically eased following a reconciliation by leaders of the two major political coalitions.
Kenya’s $1.5 billion standby agreement with the IMF lapsed on Sept. 14, 2018. SP Global viewed this standby agreement as an extra buffer to Kenya’s external position. The lapse of the arrangement also came at a time when the country’s central bank has managed to bulk up its foreign currency reserves to almost $8.5 billion, up nearly $1.3 billion from December 2017. The agency does not believe the lapse of the IMF program will not significantly stall the government’s pursuit of politically sensitive tax reforms and the removal of lending rate caps.
“Our ratings on Kenya are constrained by the country’s weak external position, its history of ethnic tensions, low wealth levels, and high government fiscal deficits and debt stock.”
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