S&P may lower Kenya’s rating, warns on election spending

Kenya, East Africa’s biggest economy, may have its sovereign credit rating cut by one level because of the nation’s fiscal deficit, S&P Global Ratings’ Financial Services Director Neil Gosrani said.

“The negative outlook means the rating would go to B flat,” Gosrani told reporters Thursday in the capital, Nairobi. The likelihood of excessive spending on elections scheduled for August 2017 will raise more red flags, he said.

The nation budgeted for a deficit of 8.7 percent of gross domestic product for the fiscal year through June 2016 from 7.8 percent a year earlier, mainly on account of spending on a new railway linking the capital to the port city of Mombasa. Treasury expects to see the shortfall narrowing to 6.9 percent in the year beginning July 1.

The ratings company said it expects the nation will attract higher interest rates when it sells a second Eurobond. Kenya’s debut 10-year sovereign paper sold at 6.88 percent in 2014. Yields on the notes maturing in June 2024 dropped 2 basis points to 8.31 percent by 12:08 p.m. in London. Treasury Secretary Henry Rotich has said the $61 billion economy will ask foreign investors for more money before the end of 2016, after raising $2.82 billion in 2014.

“There’s going to be a risk-premium increase,” S&P Financial Services Ratings Director Matthew Pirnie said of any future issues.

Kenya may require 2.15 trillion shillings ($21.3 billion) for government expenditure in the 2016-17 fiscal year, according to budget estimates. It planned gross spending of 2.26 trillion shillings in the current financial year.

The shilling weakened 0.2 percent to 100.85 against the dollar by 1:50 p.m. in Nairobi.

The credit ratings of African nations have fallen in the past two years because of a decline in commodity prices, particularly oil, weak global growth, reduction in credit quality and an increase in defaults, Gosrani said.

“Two years ago, the ratings would be higher or the outlook would be stable,” he said.