Moody’s demotes Kenya after Finance Bill rejection

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Moody's demotes Kenya after Finance Bill rejection
Moody's demotes Kenya after Finance Bill rejection

Africa-Press – Kenya. Kenya stares at longer periods of sustained higher interest rates to keep the local currency stable after Moody’s Investors Service downgraded its debt ratings.

Moody’s revised Kenya’s local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Caa1 from B3, maintaining a negative outlook.

Caa1 depicts a junk rating which shows a country or organisation has a high chance of defaulting in case of any shocks.

Moody’s provides credit ratings, research, and risk analysis and insights into the financial stability and creditworthiness of organisations, debt instruments, and securities.

Credit ratings from Moody’s are taken seriously by lenders and investors.

The downgrade is largely driven by the Kenyan government’s recent decision to abandon planned tax increases in favour of expenditure cuts.

It shows Kenya is struggling to increase revenue and manage its finances better.

Moody’s Investors Service vice president and senior credit officer Sovereign Risk Group David Rogovic said that, this shift in policy has significant implications for the country’s fiscal trajectory and financing needs.

“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,” said Rogovic

He added that larger financing needs and an increase in borrowing costs would amplify liquidity risks.

“In particular, 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,” he added.

Moody’s noted that, in the context of heightened social tensions, significant revenue-raising measures are unlikely to be introduced in the near future.

Consequently, the fiscal deficit is expected to narrow more slowly, with debt affordability remaining weak for an extended period.

This scenario increases liquidity risk amid uncertain external funding options.

Kenya had initially planned to implement tax increases as part of its 2024 Finance Bill, which aimed to raise Sh346 billion (1.9 percent of GDP).

However, due to social unrest, the government cancelled these measures, opting instead for spending cuts amounting to Sh177 billion.

The new strategy increases the fiscal deficit to 4.6 percent of GDP, compared to the original 3.3 percent target.

Moody’s now expects the fiscal deficit to average 4.4 percent of GDP for fiscal years 2025 and 2026, a slower pace of consolidation than previously forecasted.

This expenditure-based approach provides less support for debt affordability. The interest-to-revenue ratio is projected to rise to 33 percent in fiscal 2025 from 30 per cent in fiscal 2024, indicating significant fiscal constraints.

Although domestic borrowing costs are expected to decline gradually, debt affordability will remain weaker than previously anticipated due to larger fiscal deficits and lower revenue.

The government’s plan to cut spending faces significant implementation risks. Over half of the government’s spending in fiscal 2025 is allocated to Consolidated Fund Services, which includes non-discretionary obligations.

Proposed measures include dissolving 47 state corporations, suspending new public sector hiring, and conducting payroll audits.

Moody’s says, however, significant cuts will still be needed in discretionary areas like operations, maintenance, and development spending, potentially impacting economic growth.

Additionally, Kenya is vulnerable to external shocks, such as extreme weather events, which could necessitate increased government spending on emergency relief and infrastructure repairs.

Larger fiscal deficits will increase Kenya’s borrowing requirements, adding pressure on domestic borrowing costs and amplifying liquidity risks.

Moody’s forecasts that increased domestic borrowing will keep interest rates elevated.

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