Standard & Poor's affirmed its B+/B long- and short-term foreign and local currency sovereign credit ratings on Kenya, saying that the country’s economic growth prospects remain strong in the medium term. The global ratings agency expects East Africa’s biggest economy to expand at an average rate of over 5.5% between 2014 and 2017, accelerating from 3.8% over the previous five years. The GDP forecast reflects increased external demand, higher consumption, backed by domestic credit growth, and investment growth, backed by public investment in key infrastructure projects, particularly railways and ports.
However, agricultural production, which accounts for 25% of GDP, and inflation remain vulnerable to poor weather conditions, which could also reduce hydroelectricity production and lead to increasing external pressure through expensive replacement oil imports.
Kenya’s ratings are supported by its moderate external debt, its diversified economy with a strong private sector and growing middle class, a large and growing domestic debt market, and satisfactory monetary flexibility. On the other hand, the ratings are constrained by the country’s history of ethnic tensions, low GDP per capita (at approximately USD 1,059 in 2014), relatively high government debt, and susceptibility to balance-of-payments pressures, S&P said. It noted that the pending trials of Kenya’s president and vice-president at the International Criminal Court (ICC), related to violence at the 2007 general election, could pose potential political risks, but the overall stability is generally expected to continue. Ongoing attacks from insurgency groups also pose risks, as they are increasingly directed towards Kenya's tourist infrastructure and could potentially hamper growth in the sector, FDI flows, and foreign exchange earnings.
S&P sees both risks and potential benefits in the government's efforts to decentralise its administrative functions. A successful fiscal decentralisation strategy could address the shortfall in basic services and infrastructure as it could mean more-targeted expenditure. The downside risks are related to a generally weak institutional capacity at the local level, so wasteful duplications of administrative layers and spending programmes could arise.
S&P maintained its stable outlook on Kenya’s ratings, saying that the improving economic prospects are moderated by concerns over devolution implementation risks, and fiscal and external account deficits.
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