Moody’s Ratings (Moody’s) has downgraded Kenya’s local and foreign-currency long-term issuer ratings, including foreign-currency senior unsecured debt ratings, to Caa1 from B3. The outlook remains negative.
Moody’s decision to downgrade Kenya’s rating primarily stems from the country’s diminished capacity to implement revenue-based fiscal consolidation, a critical factor for improving debt affordability and steering the fiscal deficit on a downward trajectory
“The negative outlook reflects downside risks related to government liquidity,” read part of a statement by the credit rating agency.
According to Moody’s, the government’s decision to withdraw the Finance Bill and instead rely on budget cuts to reduce the fiscal deficit could cause implications for Kenya’s financing needs.
“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,” the statement added.
The report highlights that Kenya’s current strategy will likely result in slower fiscal consolidation and a prolonged period of elevated debt affordability challenges. The government’s inability to introduce significant revenue-raising measures due to heightened social tensions further exacerbates the situation. This scenario creates increased liquidity risks associated with higher financing needs and uncertain external funding options.
Kenya’s local currency (LC) ceiling has been lowered to B1 from Ba3, maintaining a three-notch difference with the sovereign rating. This reflects the relatively weak institutions and moderate political risk set against the government’s limited role in the economy and the country’s external imbalances.
Similarly, the foreign currency (FC) ceiling was reduced to B2 from B1. This adjustment, one notch below the LC ceiling, reflects Kenya’s low external debt levels and a moderately open capital account, which reduces (though does not eliminate) the need for transfer and convertibility restrictions in financial stress scenarios.
The downgrade to Caa1 from B3 marks a significant shift from Moody’s previous assumption that Kenya’s government would pursue a robust fiscal consolidation strategy involving substantial revenue-raising measures. These measures were expected to narrow the fiscal deficit, reduce debt burden growth, and stabilize debt affordability. Without these efforts, Kenya faces intensified financing pressure from large external amortizations.
The negative outlook highlights downside risks primarily related to liquidity and elevated refinancing needs against limited external financing options. This situation increases reliance on costly domestic financing, further straining the fiscal deficit.
In response to widespread protests, the Kenyan government recently cancelled planned tax increases included in the 2024 Finance Bill. Originally intended to raise KES 346 billion (1.9% of GDP), these tax measures were a cornerstone of the fiscal consolidation strategy. The government now plans to reduce spending by KES 117 billion and increase borrowing, pushing the fiscal deficit to 4.6% of GDP—1.3% higher than the previously projected 3.3% for fiscal 2025.
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