Kenyan Rating Outlook Cut to Negative on Debt Pileup, S&P Says

Kenya’s credit rating outlook was lowered to negative from stable because of elevated risks from currency depreciation and a widening budget deficit, Standard & Poor’s said.

The country’s rating was affirmed at B+, four levels below investment grade, the New York-based company said in a statement on Friday.

"The negative outlook reflects our opinion that Kenya’s fiscal position is structurally weakening and that this will feed into a mounting debt stock, which could also increase external vulnerabilities," it said in the statement.

The change in outlook follows a similar move by Fitch Ratings in July. Kenya, the world’s largest exporter of black tea and the biggest economy in East Africa, is facing a number of challenges including attacks by Islamist militants that have scared off tourists and changing weather patterns, which have affected farming output.

Kenya’s government and the World Bank both reduced their growth forecasts for the $55 billion economy on Thursday. The Washington-based lender projects expansion of 5.4 percent this year, compared with an estimate of 6 percent in December, while the Treasury is more optimistic, predicting 6 percent growth, down from a projection of 6.5 percent previously.

Rising Debtload

Kenya’s debt is equivalent to 45 percent of its gross domestic product, a figure that could swell to 60 percent by the fiscal year through June 2017, said Standard & Poor’s. The country sold an inaugural Eurobond last year, raising a total of $2.75 billion, and it expects a $750 million syndicated loan will come through by the end of this month. The government has also tapped two loan agreements with China worth $3.6 billion, Standard & Poor’s said.

The ratings agency on Friday revised its budget deficit forecast to 9.4 percent of GDP for 2014-15, from a previous estimate of 7.3 percent in April. While much of that increased financing burden is related to spending to accelerate construction of a new railway, the "structural deficit" also remains high, Standard & Poor’s said.

The central bank has increased its benchmark interest rate by 300 basis points this year to support the shilling and the resulting rise in interest rates has made government borrowing on the local markets more costly. The 91-day Treasury bill yield is at a 17-year high.

The cost of external debt is also climbing and "we expect higher interest costs will further pressure Kenya’s public finances," the ratings agency said.

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