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Kenya Outlook Revised To Negative On COVID-19; ‘B+/B’ Ratings Affirmed

S&P Global Ratings revised its outlook on Kenya to negative from stable given the deteriorating fiscal and external outlook and higher debt and interest burdens. At the same time, the rating agency has affirmed our ‘B+’ long-term and ‘B’ short-term sovereign credit ratings on Kenya.

The negative outlook reflects Kenya’s deteriorating fiscal and external position following the effects of COVID-19-related disruptions on the economy and fiscal metrics. The negative outlook also reflects the risk of wider external financing gaps if funding from official lenders is not as forthcoming as we forecast.

The ratings could also come under downward pressure if the ultimate economic fallout from the pandemic, and/or weaker policy momentum, derailed Kenya’s efforts to curb its twin deficits, pushing external debt up, and/or weakening external liquidity beyond our current projections.

The Rating agency could revise our outlook to stable if analysts see a significant and sustained improvement in Kenya’s fiscal and external accounts. We could also revise our outlook to stable if Kenya reverts to strong GDP growth and fiscal consolidation more rapidly than expected, which would in turn help address debt vulnerabilities.

The Rating agency expect that the negative economic fallout of the pandemic shock will drive real GDP growth down to 1% in 2020, followed by a rebound to 4% in 2021. The economic shock will also widen Kenya’s twin fiscal and external deficits. In particular, we project that in fiscal year 2020 (FY2020; ending June 2020) the general government deficit will widen to 8.7% of GDP, before falling slightly to 7.9% in FY2021. The financing of these deficits in turn will raise external debt levels and increase external vulnerabilities.

The ratings on Kenya are nevertheless supported by its diversified economic base, including its large and diversified agricultural and services sectors, relative to peers, which should help cushion its economy.

Kenya also benefits from flexible monetary settings, supported by its deep and dynamic domestic capital markets (with local currency debt market capitalization estimated at over 25% of GDP), and relatively more advanced institutional framework compared to peers. Our ratings are constrained by the country’s weak external position with its sizable current account deficits, low GDP per capita, high fiscal deficits and debt stocks, and its history of ethnic tensions.