Rationale
Dagong assigns “B” to both local and foreign currency
long term sovereign credit ratings for the Republic of Kenya (hereinafter
referred to as “Kenya”) based on comprehensive consideration of such factors as
its government debt burden, financial and foreign exchange capabilities, as well
as national management capacity, economic strength and financial
strength.
Increasingly higher cost in public sector wage level and
debt interest payment in recent years has made it difficult for the government
revenues to cover the expenditure, as a result the government can not maintain
fiscal balance even after receiving external financial assistance; therefore,
fiscal deficit and debt scale have showed a trend of gradual expanding. Rise in
spending on development is the main reason for the increase of debt scale, Kenya
Vision 2030 emphasizes on expansion of rural infrastructure investment, which
means the central government will increase the scale of capital investment for a
long period of time in the future. In view of the poor growth potential in
fiscal revenues, it is expected that the budget deficit to GDP ratio will reach
6.8% in the fiscal year 2010/11; meanwhile, the government financing demand will
rise more rapidly, it is expected that the total debt issuance will amount to
188 billion Euros in the fiscal year 2010/11, over the same period the relative
proportion of total public debt will maintain a trend of slow rise as well.
Although the assistance from international organizations
has, to some extent, guaranteed the government's basic debt solvency; however,
since it is difficult for the economic growth rate to return to the pre-crisis
level and the deteriorating debt situation is continuing, therefore the future
solvency of the country will be subject to certain constraints, which are
focused on the following aspects:
l
The
national development strategy is clearly positioned and well implemented, but
the future will remain subject to the unstable domestic factors; the
consolidated dominant status in regional economy has contributed to continuing
improvement in relations with international organizations, however domestic
corruption may contain the progress in bilateral relations, thereby affecting
the sustainability of external financing channel in the medium to long term.
l
Short-term prospects for economic growth was hampered by
multiple factors and it is difficult to return to the pre-crisis level, and
unbalanced regional economic development will be the main restricting factor in
future economic growth for a long-term time period.
l
The
financial system is relatively underdeveloped, which means a relatively
insufficient support to the real economy, but still has great development
potential; its sound financial regulation protects the financial system from
external shocks, the possibility of generating contingent debt for the
government is relatively low in the short-term.
l
The
revenue structure of over-reliance on taxes limits the improvement in financial
strength, so the future revenue growth will be slightly weak. With the
continuing financial incentives, fiscal deficits and government debt will remain
a slow rise in the next few years.
l
Resumption of the inflow of external capital can cover
the current account deficit in substance, and maintain a slow increase of total
foreign exchange reserves and the stable currency value; the stable external
financing ensures the sustainability of external debt in short-and-medium-term,
but in the long term it will still face political
constraints
Outlook Although
the scale of deficit and debt in Kenya is still
at a high level, but with the implementation of the new constitution, the
government will gradually optimize the structure of financial expenditure in the
future and form a more positive interaction with economic growth, therefore
maintaining debt sustainability. In the medium to long term, Kenya still
needs to bridge the domestic income distribution gap, thereby solving the
deep-seated contradictions which pose the fundamental obstacle to economic
growth. Although the smooth implementation of the 2030 Vision plan has created a
favorable condition for it, however it is still subject to fluctuations in
domestic political situation, the possibility of forced interruption can not be
completely ruled out. In view of this, Dagong keeps the stable outlook for
Kenya’s sovereign credit rating of
both the local currency and foreign currency in the next 1-2 years.
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