Ratings:
Foreign and Local Currency: B+/Stable/B

For further details see ratings list.

Overview

Kenya's economic performance is stabilizing at higher levels, thanks to 
receding political tensions after a protracted 2017 election cycle, 
improved weather conditions, and recovering tourism.
However, Kenya's fiscal and external imbalances remain sizable.
We are affirming our 'B+/B' ratings on Kenya.
The outlook is stable.

Rating Action

On Sept. 21, 2018, S&P Global Ratings affirmed its 'B+/B' long- and short-term
foreign and local currency sovereign credit ratings on Kenya. The outlook is 
stable.

Outlook

The stable outlook reflects our expectation that strong growth prospects will 
facilitate some fiscal consolidation, although external debt will continue to 
increase over the next year.

We could lower the ratings if the country's external position weakens more 
than expected, for example due to higher current account deficits, and 
consequently a faster increase in external debt, or due to a decline in 
Kenya's external buffers in the absence of an International Monetary Fund 
(IMF) program. We could also consider lowering the ratings if Kenya were to 
backtrack on its reform efforts (in the absence of IMF conditionalities) on 
taxes and removing lending rate caps, hampering fiscal consolidation and 
economic performance.

We could raise the ratings if we were to see a significant and sustained 
improvement in Kenya's fiscal and external accounts. Nevertheless, we see 
limited prospects of raising the ratings over the next six-12 months.

Rationale

Our ratings on Kenya are supported by its track record of reasonably strong 
headline and per capita GDP growth, and its increasingly diversified economic 
base relative to peers in the region. In our opinion, Kenya also benefits from
deeper domestic capital markets than regional peers; close to 45% of the 
general government debt stock is denominated in local currency, with local 
currency debt market capitalization estimated at 25% of GDP at end-December 
2017. We believe Kenya's institutions are improving. Court rulings during the 
last election season demonstrate a relatively independent judiciary, providing
evolving checks and balances to other arms of the government, which sets Kenya
apart from peer countries in the region. The government's executive branch is 
pursuing politically sensitive economic reforms that enhance tax revenues and 
private-sector credit growth, despite some pushback from the legislative 
branch. Kenya's political tensions have drastically eased following a 
reconciliation by leaders of the two major political coalitions.

Kenya's $1.5 billion standby agreement with the IMF lapsed on Sept. 14, 2018. 
We viewed the lapsed standby agreement as an additional buffer to Kenya's 
external position. The lapse of the arrangement comes at a time when Kenya's 
central bank has built up its foreign currency reserves to almost $8.5 
billion, up nearly $1.3 billion from December 2017. We believe that the lapse 
of the IMF program will not significantly stall the government's pursuit of 
politically sensitive tax reforms and the removal of lending rate caps.

Our ratings on Kenya are constrained by the country's weak external position, 
its history of ethnic tensions, low wealth levels, and high government fiscal 
deficits and debt stock.

Institutional and Economic Profile: Improving institutional framework relative to peers supports growth prospects

Following the 2017 election cycle, Kenya's government institutions will 
likely function more effectively, because political tensions have largely 
dissipated, in our view.
We think that economic growth prospects will remain reasonably strong, 
despite significant fiscal and external deficits.

Following the prolonged 2017 election cycle, senior politicians and their 
parties have reconciled. President Kenyatta and opposition leader, Mr. Odinga,
publicly shook hands in March 2018 and pledged to put aside their differences.
Since then, political tensions have drastically reduced. These developments 
have put the spotlight back on the Kenyan government's ability to provide 
economic opportunities to its growing population. We also think that court 
rulings in Kenya, particularly during the last election season, demonstrate a 
relatively independent judiciary. While we acknowledge evolving checks and 
balances between the judiciary and executive branches, we still consider that 
Kenya has reduced predictability of future policy responses due to parts of 
the population desiring more political or economic participation. We note that
the government's executive branch is gradually attempting to pursue measures 
that enhance tax revenues, for example by increasing fuel taxes, and 
advocating for the removal of lending rate caps to encourage private-sector 
credit growth. However, both initiatives have been met with some resistance by
the legislative branch.

Following a slight drag in 2017, the Kenyan economy is gradually stabilizing 
at a somewhat higher level than in 2018. In 2017, the economy grew at about 
4.9%, constrained by uncertainty related to the prolonged 2017 election 
period, weaker business and consumer confidence, as well as unfavorable 
weather conditions. In the first quarter of 2018, real GDP growth stood at 
5.7% year on year. The Kenyan economy is benefitting from stabilization of the
political landscape, which has boosted business and consumer confidence, 
improved weather conditions, and a recovering tourism sector. The agriculture 
sector, which makes up almost one-third of the Kenyan economy, has rebounded, 
with growth in real terms of 5.1% thanks to more favorable weather conditions 
than for the same quarter last year. However, the sector remains vulnerable to
adverse weather conditions (drought in 2011, 2014, and 2016-2017), which can 
lead to a notable reduction in production of key food crops such as maize, 
beans, and potatoes.

In the medium term, we expect GDP growth will be strong, averaging about of 
5.5% in 2018-2021. A diversified economic base--driven by a strong private 
sector, a resilient tourism sector, and productivity gains from large-scale 
public- and private-sector infrastructure investments--underpins this growth. 
Infrastructure projects, mainly in the energy and transport sectors, include 
the second phase of the extension of the railway between Nairobi and Mombasa, 
the development of the Lamu Port, a new transport corridor linking Southern 
Sudan and Ethiopia, and the development of power plants. These projects have 
the potential to increase foreign direct investment and support Kenya's 
economic momentum. We expect that the investments in the rail networks will 
attract private-sector investment in a new and important regional trade 
corridor. We estimate wealth levels, measured by GDP per capita, at $1,700 in 
2018, while real GDP per capita growth will average 2.8% over 2018-2021.

Flexibility and Performance Profile: Constraints stem from a weak external position, large fiscal deficits, and a relatively high debt burden

Kenya's external reserves, despite a recent increase, remain quite modest,
while external indebtedness is still rising.
Although current account deficits are declining, financing is increasingly
reliant upon external debt, which could threaten Kenya's external 
position, especially if the country is unable to broaden its exports to 
increase current account receipts (CARs).
Large fiscal and debt burdens are rating weaknesses, and fiscal 
consolidation is key to stabilizing debt metrics.

Since the completion of the SGR Phase 1 railway line between the capital city 
of Nairobi and the main port of Mombasa, import demand has moderated. 
Preliminary balance-of-payments data for the first half of 2018 point to a 
narrowing current account deficit, with a deficit of 5.8% of GDP as of June 
2018, compared with 6.4% one year ago. The improvement in exports is from the 
growth of agricultural exports, resilient remittance inflows, and stronger 
tourism receipts. Higher payments for oil imports, because of the rebound in 
international oil prices, and the increased import of machinery and transport 
equipment related to the start of the SGR phase 2 project could weigh on the 
rebalancing of the current account, though. We expect the current account 
deficit will stay close to about 6% of GDP in 2018 and 2019, before moderating
toward 5% in 2020 and 2021. That said, we note that deficit levels have 
improved from an average of 8.6% over 2012-2015.

As net inward foreign direct investment in Kenya is low--and will likely 
remain so--at less than 1% of GDP, the funding of the current account deficit 
relies increasingly on external debt financing. As a result, external 
borrowing by both the public and private sector has increased in recent years,
resulting in our estimate of gross external financing needs to CARs plus 
usable reserves averaging close to 140% over 2018-2021. Gross external 
financing needs are still high, partially due to short-term external debt 
repayments, which we estimate at close to 65% of CARs. Conversely, we expect 
that narrow net external indebtedness will continue to increase to about 180% 
of CARs in 2021 from 136% in 2017. The private sector and banks have very 
small net open foreign currency positions. The government issued a $2 billion 
Eurobond in February 2018 in international markets, which has helped the 
Central Bank of Kenya (CBK) central bank build its external buffers to a peak 
of close to $9.4 billion in March 2018. Due to what we view as external 
short-term debt-servicing requirements, the CBK has made foreign currency 
available, and we have observed a gradual reduction in these external buffers 
to about $8.5 billion as of September 2018. The central government also repaid
a maturing loan syndication of $646 million at the end of April 2018. We 
expect the trend of gradually declining foreign currency reserves will 
continue for the remainder of the year, stabilizing at around $8 billion by 
the year-end.

Our external sector forecasts also depend on an improvement in CARs. We expect
to see better service receipts (mainly Kenya Airways' service exports); stable
tourism receipts; steady tea, coffee, and horticultural exports, which 
combined make up at least 50% of export receipts; and strong remittances from 
abroad. If CARs underperforms our projections while debt accumulation 
increases as anticipated, we may observe a greater strain on the external 
position, due to an increasing imbalance between foreign currency receipts and
payments to the rest of the world.

Although Kenya's fiscal deficits remain high, we observe that fiscal 
consolidation is taking place. In fiscal 2017 (July 2016-June 2017), Kenya 
reported a fiscal deficit of close to 8.6% of GDP owing to increases in 
one-off expenditures related to the elections and spending on drought relief. 
In fiscal 2018, the government posted a fiscal deficit of 7.1% of GDP against 
a budgeted deficit of 7.7%. Although revenue collections were lower (mainly 
income tax) than previously envisaged, the central government more than offset
this by limiting expenditures. The expenditure rationalization emanated from 
both recurring expenses, such as wages and salaries, and from development 
expenditures. We estimate that the fiscal deficit for fiscal 2019 will drop to
6% and average 5.7% in 2018-2021. We expect imbalances will reduce more 
gradually and average about 4% by 2021. We see the annual change in net 
general government debt averaging 5.7% of GDP over 2018-2021.

The pace of fiscal consolidation may slow if the government fails to implement
desired tax reforms. Among other measures, the executive branch had proposed 
introducing a 16% value-added tax (VAT) on fuel products, as well as 
implementing a wealth tax on large financial transactions--both of which have 
been vetoed by the national assembly. The president has now proposed a VAT 
rate of 8% on fuel products, which will be reconsidered by the legislature.

Given Kenya's fiscally decentralized system, which provides some autonomous 
power to lower levels of government such as county governments, the 
relationship between the two spheres can also impact fiscal consolidation. We 
have observed some strain between the two spheres of government over 
resources, as the county governments are increasingly pushing for more 
allocations through the redistribution of centrally collected revenues through
the equitable share transfer mechanism, and this could pose a threat to fiscal
consolidation targets.

We estimate that Kenya's stock of general government debt (net of liquid 
assets) will remain high, at close to 50% of GDP over 2018-2021, while 
interest payments will remain above 15% of revenues over the same period, with
about half of the stock being domestic and the other half external. Nearly 
half of the external debt is lent by multilateral creditors, while almost 
one-third is from bilateral creditors. Commercial external debt has increased 
in recent years, with Eurobond issuances of about $3 billion in 2014 followed 
by loan syndications of $750 million in the past two years and a $2 billion 
Eurobond in February 2018. We view contingent risks from state-owned 
enterprises with weak balance sheets as limited.

The CBK operates a floating exchange rate system with interventions to smooth 
volatility. In 2018, the Kenyan shilling has been largely experiencing nominal
appreciation against major currencies, owing to stable receipts from 
agriculture exports (tea, coffee, and horticulture), strong receipts from 
tourism, diaspora remittances, and external borrowing by the central 
governmenthelping strengthen the foreign currency reserves at the CBK.

The inflation rate reached a five-year high in 2017 at 8%, on the back of 
increased oil prices and the drought pushing up food prices. In 2018, the 
inflation rate decreased significantly on improved weather conditions; for the
first six months of 2018, the average annual inflation rate was 5.2%, compared
with 8.1% for the same period in 2017. We expect the inflation rate to pick up
somewhat again as the base effect on food prices fades, VAT increases are 
implemented, and economic activity remains robust. In July 2018, the Monetary 
Policy Committee (MPC) lowered the central bank rate for the second time in 
2018 to 9% (10% in the beginning of the year), since the MPC believes that 
economic output had been lower and could therefore benefit from monetary 
easing.

Domestic credit growth reduced sharply in 2016 as legislators introduced a cap
on interest rates in efforts to promote economic development through bank 
financing. Credit growth has remained muted with very low growth at 3% in 
2017. In 2018, we saw a gradual pickup in growth to about 5%. We expect this 
trend will continue as the national assembly has decided to keep the interest 
rate caps on lending rates, despite dropping the minimum rate on deposits. The
executive and the CBK have been pushing to remove the caps.

We anticipate that restructuring of banks' corporate exposures, including 
government-related entities such as Kenya Airways, will result in additional 
impairments. We also expect credit impairment to increase in 2018 because of 
flagging economic activity and the adoption of International Financial 
Reporting Standards 9. We forecast normalized credit losses will average 
1.5%-2.0% again this year. The regulator proposed that banks use a five-year 
transition period to recognize the additional impairments in order to mitigate
the impact on capitalization. As a result, we are likely to see pressure on 
net interest margins, cost of funds, earnings, and banks' capitalization, 
which could reduce closer to the minimum regulatory requirement of 14.5%.

Key Statistics

Table 1

Ratings Score Snapshot

Table 2

Related Criteria And Research

Related Criteria

Criteria - Governments - Sovereigns: Sovereign Rating Methodology - 
December 18,2017
General Criteria: Methodology: Criteria For Determining Transfer And 
Convertibility Assessments - May 18,2009
General Criteria: Use Of CreditWatch And Outlooks - September 14,2009
General Criteria: Methodology For Linking Long-Term And Short-Term Ratings
 - April 07,2017

Related Research

Sovereign Ratings List, Sept. 5, 2018
Sovereign Ratings History, Sept. 5, 2018
Sovereign Ratings Score Snapshot, Sept. 4, 2018
Global Sovereign Rating Trends Midyear 2018, July 16, 2018
Sovereign Risk Indicators, July 5, 2018. An interactive version is 
available at http://www.spratings.com/sri
Default, Transition, and Recovery: 2017 Annual Sovereign Default Study And
Rating Transitions, May 8, 2018
Sovereign Debt 2018: Global Borrowing To Remain Steady At US$7.4 Trillion,
Feb. 22, 2018

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision.

After the primary analyst gave opening remarks and explained the 
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk 
factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the 
Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria And Research').

Ratings List

                                             Rating                           
                                             To                From           
Kenya
 Sovereign Credit Rating                                                      
  Foreign and Local Currency                 B+/Stable/B       B+/Stable/B    
 Transfer & Convertibility Assessment        BB-               BB-            
 Senior Unsecured                                                             
  Foreign Currency                           B+                B+             

Regulatory Disclosures

Primary credit analyst: Gardner Rusike, Associate Director.
Rating Committee Chairperson: Christian Esters
Date initial rating assigned: Sept. 8, 2006
Date of previous Review: March 23, 2018

Disclaimers

This rating has been determined by a rating committee based solely on the 
committee's independent evaluation of the credit risks and merits of the 
issuer or issue being rated in accordance with S&P Global Ratings' published 
criteria and no part of this rating was influenced by any other business 
activities of S&P Global Ratings.

This credit rating is solicited. The rated entity did participate in the 
credit rating process. S&P Global Ratings did have access to the accounts, 
financial records and other relevant internal, non-public documents of the 
rated entity or a related third party. S&P Global Ratings has used information
from sources believed to be reliable but does not guarantee the accuracy, 
adequacy, or completeness of any information used.

Materials Used In The Credit Rating Process

Sufficient information in general consists of both (i) financial statements 
that describe the Issuer's financial condition, results of operations and 
cash-flows, and (ii) a description of the activities and obligations of the 
entity including of its governance and legal structure.

This credit rating was disclosed to the rated entity or related third party 
before being issued.

Glossary

Consumer price index: Index of prices of a representative set of consumer 
goods regularly bought by a typical household.
Current account balance: Exports of goods and services minus imports of 
the same plus net factor income plus official and private net transfers.
Current account receipts (CAR): Proceeds from exports of goods and 
services plus factor income earned by residents from nonresidents plus 
official and private transfers to residents from nonresidents.
Date initial rating assigned: The date S&P Global Ratings assigned the 
long-term foreign currency issuer credit rating on the entity.
Date of previous review: The date S&P Global Ratings last reviewed the 
credit rating on the entity.
Debt burden assessment: Reflects a sovereign's prospective debt level, as 
indicated by the general government debt relative to GDP (including 
assessment of contingent liabilities), the interest cost of the debt 
relative to general government revenue, and debt structure and funding 
access.
Economic assessment: Based on the analysis of economic structure and 
growth prospects. Reflects income levels (GDP per capita), economic growth
prospects, and economic diversity and volatility.
External assessment: Based on the analysis of external liquidity and 
international investment position as well as the status of a sovereign's 
currency in international transactions. Reflects a country's ability to 
obtain funds from abroad necessary to meet its public- and private-sector 
obligations to nonresidents.
Fiscal performance and flexibility assessment: Reflects the sustainability
of sovereign's fiscal deficits. Based on the prospective change in general
government debt, calculated as a percentage of GDP, taking into account 
long-term trends and a government's fiscal flexibility and 
vulnerabilities.
Foreign direct investment (FDI): Direct investment by nonresidents.
GDP per capita: GDP divided by population.
General government: Aggregate of the national, regional, and local 
government sectors, including social security and other defined benefit 
public-sector pension systems, and excluding intergovernmental 
transactions.
General government debt: Debt incurred by national, regional, and local 
governments and central bank debt.
General government interest: Interest payments on general government debt.
General government liquid financial assets: General government deposits in
financial institutions (unless the deposits are a source of support to the
recipient institution), widely traded securities, plus minority 
arms-length holdings of incorporated enterprises that are widely traded 
plus balances of defined-benefit government-run pension plans or social 
security funds (or stabilization or other freely available funds) that are
held in bank deposits, widely traded securities, or other liquid forms.
Gross domestic product (GDP): Total market value of goods and services 
produced by resident factors of production.
Gross external financing needs: Current account payments plus short-term 
external debt at the end of the prior year, including nonresident deposits
at the end of the prior year plus long-term external debt maturing within 
the year.
Institutional assessment: An analysis of how a government's institutions 
and policymaking affect a sovereign's credit fundamentals by delivering 
sustainable public finances, promoting balanced economic growth, and 
responding to economic or political shocks. Reflects the effectiveness, 
stability, and predictability of the sovereign's policymaking and 
political institutions; transparency and accountability of institutions, 
data, and processes; the sovereign's debt payment culture; and security 
risks.
Monetary assessment: The extent to which a sovereign's monetary authority 
can fulfil its mandate while supporting sustainable economic growth and 
attenuating major economic or financial shocks. Based on the analysis of 
the sovereign's ability to coordinate monetary policy with fiscal and 
other economic policies to support sustainable economic growth; the 
credibility of monetary policy, and the effectiveness of market-oriented 
monetary mechanisms.
Narrow net external debt: Stock of foreign and local currency public- and 
privatesector borrowings from nonresidents minus official reserves minus 
public-sector liquid claims on nonresidents minus financial sector loans 
to, deposits with, or investments in nonresident entities.
Net general government debt: General government debt minus general 
government liquid financial assets.
Net external liabilities: Total public- and private-sector liabilities to 
nonresidents minus total external assets.
Official reserves: Monetary authority liquid claims in foreign currency 
(including gold) on nonresidents.
Real GDP per capita: Constant-price per capita GDP.
Trade balance: Exports of goods minus imports of goods.
Usable reserves: Official reserves minus items not readily available for 
foreign exchange operations and repayment of external debt.

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action
can be found on S&P Global Ratings' public website at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column. Alternatively, call one of the following S&P Global Ratings numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow 7 (495) 783-4009.

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action
can be found on S&P Global Ratings' public website at www.standardandpoors.com
. Use the Ratings search box located in the left column. Alternatively, call 
one of the following S&P Global Ratings numbers: Client Support Europe (44) 
20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; 
Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 
783-4009.