Moody’s Downgrades Kenya’s Ratings to Caa1 from B3, Net Outlook Remains Negative

Moody’s Ratings has downgraded the Government of Kenya’s local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Caa1 from B3, citing a weakened capacity for fiscal consolidation. The outlook for Kenya’s rating remains negative.

The downgrade stems from the government’s decision to abandon planned tax increases and instead rely on expenditure cuts to reduce the fiscal deficit.

This shift, Moody’s says, carries “material implications for Kenya’s fiscal trajectory and financing needs,” suggesting a slower reduction in the deficit and prolonged debt affordability concerns.

“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,” Moody’s report stated.

The negative outlook reflects the amplified risk to government liquidity, with Moody’s expecting a slower than anticipated narrowing of the fiscal deficit. This, coupled with potential increases in borrowing costs, could exacerbate liquidity risks.

The report warns that slower fiscal consolidation might constrain external funding options, particularly from multilateral creditors, who have been a major source of external financing since 2020.

Additionally, larger financing needs could reduce domestic appetite for government securities, making it harder for Kenya to service its domestic debt.

Moody’s also lowered Kenya’s local currency ceiling to B1 from Ba3, maintaining a three-notch difference with the sovereign rating, citing “relatively weak institutions and policy predictability and moderate political risk.”

This downgrade by Moody’s signals a concerning trend in Kenya’s financial health. The country’s ability to manage its debt burden and secure external financing remains under scrutiny, highlighting the need for swift and decisive action to address the challenges outlined by the rating agency.