Moody’s says Kenya B1 rating reflects robust growth potential balanced

Nairobi, Kenya (Capital Markets in Africa) —  Kenya’s B1 rating and stable outlook reflect the country’s robust growth potential, its leadership role in the East African region and its commitment to structural reforms, Moody’s Investors Service said in a report published today.

These advantages are balanced against Kenya’s weak, although strengthening institutions, large twin (government and current account) deficits and national security challenges. The decentralization of the government introduced in the 2010 constitution has helped to address the lack of local representation in the former system, which had fostered inter-ethnic tensions. However, the devolution is partly responsible for wider government budget deficits, which Moody’s believes will be difficult to contain.

“The government’s decision to sign two simultaneous IMF Stand-by agreements (SBAs) in February 2015 is strong evidence of its determination to implement structural economic reforms, most importantly in the public sector,” said Kristin Lindow, Senior Vice President and co-author of the report. “Meanwhile, the energy and transport infrastructure expansion currently underway should drive robust growth and improve regional trade links.”

Kenya has emerged as Africa’s “start-up” nation, with high-technology innovation facilitated by the laying of an undersea fiber optic cable in 2009 that brought high-speed 4G internet to the country. Big international technology firms like Google, Oracle and IBM have singled out Kenya in Sub-Saharan Africa, establishing research centers and supporting and encouraging the already-vibrant entrepreneurship climate with a view to using the country as a base for operations throughout East Africa or even all of Sub-Saharan Africa. Such investments are likely to multiply following the Global Entrepreneurship Summit.

On the other hand, Moody’s noted that Kenya is also an increasingly frequent target of attacks by the Somali-based al-Shabaab terrorist movement, which have taken a heavy toll in terms of lives over the past 18 months as well as having devastated the tourism industry. In addition to security concerns, the rating agency expects that the steep drop in oil and other commodity prices is likely to slow or even suppress investment in the promising oil and gas sector.

The successful implementation of government decentralization such that more effective local governance is achieved without meaningful fiscal overruns would put upward pressure on Kenya’s rating. Further progress on economic diversification and a decline in terrorist incidents that would improve the environment for tourism would also be credit positive. At the same time, mounting fiscal slippages that could lead to an unsustainable debt path or continued security incidents or renewed political instability that substantially dampen economic growth prospects would put downward pressure on Kenya’s rating.

The report, “Credit Analysis: Government of Kenya”, is available on www.moodys.com.