Credit rating downgrade leaves Ruto facing debt problems

With a third global ratings agency downgrading Kenya’s credit rating in as many months, President William Ruto’s government now faces the new headache of rising borrowing costs, further limiting Kenya’s options for financing its growing debt.

The latest downgrade by Standard & Poor’s was due to concerns about the government’s fiscal consolidation efforts and rising debt levels, which come at a difficult time for the government. Ruto is struggling to cope The negative impact of protests against his economic policies has eroded public trust and undermined his agenda.

The downgrade follows downgrades by two other major ratings agencies in early July. Moody’s downgraded Kenya’s credit rating further to junk status in July, while Fitch downgraded Kenya’s sovereign rating from “B” to “B-” earlier this month, causing Kenya’s dollar bond prices to fall.

Multiple challenges including a credit ratings downgrade, social unrest and wider economic headwinds have put the Ruto government in a perilous position as it seeks to restore international investor confidence and secure funding for its ambitious development plans, analysts said yesterday.

They warn that the government’s ability to borrow domestically and globally will be severely constrained, which could force it to make difficult choices between servicing debt, funding critical public services and financing job-creating infrastructure projects – a delicate balancing act that could further strain relations between the government and Kenya’s restless youth.

As Ruto works to restore stability and revive the economy, Rising Ghost Analysts say looming problems of debt and limited access to credit pose a major test of his leadership and the long-term viability of his reform plans.

Global credit ratings agency Standard & Poor’s on Friday downgraded Kenya’s rating to ‘B-‘ from ‘B’, citing the East African country’s recent repeal of the 2024/2025 Finance Bill, saying it would slow down its fiscal consolidation.

The setback comes at a time when the Ruto government is under increasing pressure to meet the aspirations of the country’s rapidly growing youth population, often referred to as “Generation Z”.

Ruto’s government has vowed to prioritize economic reforms and fiscal discipline, but analysts and some youth say critics say reforms have been slow to materialize, leading to growing frustration among youth who had pinned their hopes on the government’s promises of change.

“We were promised a new dawn, but so far, things remain the same,” said Amina Juma, a Nairobi university student.

In issuing its decision, S&P noted that following youth protests, the government decided to scrap tax increases planned in the 2024 Finance Bill and instead rely on spending cuts to reduce the fiscal deficit.

The agency said Kenya’s ability to raise revenue and reduce its debt burden has been significantly reduced.

“The downgrade reflects our view that Kenya’s medium-term fiscal and debt outlook will deteriorate,” S&P said.

“While short-term external liquidity pressures have eased slightly, Kenya’s structurally large external imbalances remain a key weakness,” S&P added.

Following protests that left more than 50 people dead, Ruto scrapped the government’s annual finance bill, which contained Sh346 billion in tax increases.

Downgrade A negative outlook means the government will have to pay higher interest rates when borrowing domestically and internationally.

That’s a challenge because Kenya is still dealing with high domestic borrowing costs even as inflation has eased and the shilling has strengthened.

Higher borrowing costs will make it harder for Kenya to repay both domestic and foreign debts.
A downgrade could also limit the country’s access to external financing, including from multilateral lenders. This high-cost borrowing environment is a major challenge for President Ruto’s government.

Analysts now say the government must strike a balance between fiscal consolidation and maintaining social stability, but with limited options for raising revenue, it may have to rely more on costly domestic and foreign financing.

As the Ruto government navigates a turbulent period, analysts warn that failure to deliver on its reform agenda and youth-focused initiatives could have far-reaching political and social consequences.

“This downgrade will only add to the government’s woes in restoring confidence,” said Fatuma Chege, a Nairobi-based analyst.