Kenya’s Credit Rating Downgraded

Global credit rating firm, Moody’s has downgraded Kenya’s local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Caa1 from B3, saying the outlook remains negative.In a statement, Moody’s said the downgrade reflects significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend.

“In particular, the government’s decision not to pursue planned tax increases and instead rely on expenditure cuts to reduce the fiscal deficit represents a significant policy shift with material implications for Kenya’s fiscal trajectory and financing needs. In the context of heightened social tensions, we do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future,” the statement added.

“As a result, we now expect the fiscal deficit to narrow more slowly, with Kenya’s debt affordability remaining weaker for longer. In turn, larger financing needs stemming from a wider deficit increase liquidity risk against more uncertain external funding options.

The negative outlook reflects downside risks related to government liquidity. Our updated forecasts continue to assume a narrowing of the fiscal deficit through spending cuts, but at a more gradual pace than we previously assumed. Larger financing needs and/or an increase in borrowing costs would amplify liquidity risks,” Moody’s said.

In particular, it added slower fiscal consolidation would risk constraining external funding options even more, including diminishing support from multilateral creditors which have been the largest source of external financing since 2020. And larger financing needs would risk reducing domestic appetite for government securities, which would challenge the government’s ability to continue servicing domestic debt.

At the same time, Kenya’s local currency (LC) ceiling was lowered to B1 from Ba3, maintaining a three-notch difference with the sovereign rating, which reflects relatively weak institutions and policy predictability and moderate political risk set against a relatively small footprint of the government in the economy and limited external imbalances.

“The foreign currency (FC) ceiling was lowered to B2 from B1, one-notch below the LC ceiling, which reflects relatively low external debt and a moderately open capital account, which reduce, although do not remove entirely, the incentives or need to impose transfer and convertibility restrictions in scenarios of intensifying financial stress.”