Global rating agency Moody’s on Tuesday downgraded Kenya’s credit rating, citing the country’s inability to implement austerity measures due to the withdrawal of the unpopular Finance Bill 2024.
The downgrade means Kenya’s local and foreign currency debt obligations have moved further into junk territory, from ‘B3’ to ‘Caa1’.
A junk rating means it is highly speculative and has a high chance of default in the event of a shock.
The downgrade means the country’s debt obligations have moved from being “speculative” and subject to “high credit risk” to being “weak” and subject to “very high credit risk.”
Ghana, which has since defaulted on its debt obligations and is currently undergoing a restructuring, had its rating downgraded to Caa1 by Moody’s in June.
President William Ruto was forced to reject the Finance Bill 2024 following violent riots against the revenue-raising bill that aims to tax vehicles, remittances and bread.
Instead, the government chose to cut its tax collection target for the financial year ending June 2025 by Sh177 billion, even as it announced several budget cuts.
“Kenya’s downgrade reflects a significant decline in the ability to implement revenue-based fiscal consolidation measures that would improve debt sustainability and put debt on a downward trajectory,” Moody’s said in its credit rating assessment issued on Tuesday.
Moody’s poured cold water on Kenya’s ability to pursue fiscal consolidation and austerity measures through spending cuts, noting that a large portion of spending items, which largely include debt repayments, are not discretionary, meaning they must be repaid.
The credit agency noted that while there is still room for further cuts in development spending, the country appears to have reached a dead end, noting that any further cuts would lead to lower growth.
Moody’s also kept Kenya’s credit outlook at negative, meaning it is likely to lower the rating further if the country fails to implement measures to avoid default or restructure its debt.
“The negative outlook reflects downside risks to government liquidity,” Moody’s said.
Moody’s noted that a downgrade could occur if Kenya faces difficulty in meeting its financing needs at manageable costs.
“A reduced ability to access external financing or an increase in the cost of borrowing that impedes the government’s ability to meet its fiscal financing needs and debt repayment obligations would likely lead to a downgrade of the credit rating.”
Investors rely on credit rating agencies to make investment decisions. Countries with low credit ratings, including junk ratings like Kenya, suffer from a lack of liquidity.
Although the credibility of these credit ratings has been questioned due to the wide disparity between them, Kenya has also been keen to improve its rating by strengthening public finances and improving its export earnings.