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