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The Kenyan government faces higher borrowing costs after global ratings agency Moody’s downgraded Kenya’s credit rating.
Moody’s downgraded Kenya’s rating to Caa1 from B3, citing a significant deterioration in its fiscal position, although it gave it a negative outlook.
The agency said Kenya’s ability to raise revenue and reduce its debt burden has been significantly reduced.
Moody’s noted that following the Generation Z 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.
This policy shift “ Kenya’s Finances and borrowing needs,” the agency said.
“The downgrade of Kenya’s ratings reflects its significantly weakened ability to implement revenue-based fiscal consolidation that would improve Kenya’s debt sustainability and put its debt on a downward trajectory,” Moody’s said.
“In particular, the government’s decision not to pursue planned tax increases and instead rely on spending cuts to reduce the fiscal deficit is a significant policy shift with major implications for Kenya’s fiscal trajectory and financing needs.”
interest rate
The downgrade and negative outlook mean the government will have to pay higher interest rates when borrowing domestically and abroad.
That’s a challenge because Kenya is still dealing with high domestic borrowing costs even as inflation has eased and the shilling has strengthened.
“We expect domestic borrowing costs to gradually decline, but debt affordability will remain weak for longer due to wider deficits, lower revenues and greater reliance on expensive domestic financing,” Moody’s said.
The agency expects Kenya’s interest payments to rise to 33% of revenue in fiscal 2025 from 30% previously, which “indicates the severe fiscal constraints facing the government”.
Higher borrowing costs will make it harder for Kenya to service its 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.
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.
“Against the backdrop of rising social tensions, we do not expect the government to introduce significant revenue-raising measures in the foreseeable future,” Moody’s said.
“As a result, we now expect the fiscal deficit to narrow more slowly and Kenya’s debt sustainability to remain weaker for longer. In turn, higher financing needs resulting from a wider deficit increase liquidity risks and work against more uncertain external financing options.”
Moody’s said increased financing needs and higher borrowing costs will exacerbate liquidity risks.
“In particular, a slower pace of fiscal consolidation could further constrain external financing options, including reduced support from multilateral creditors, which have been the largest source of external financing since 2020,” the report said.
Kenya’s previous B3 rating was based on the government’s continued pursuit of a fiscal consolidation strategy that includes significant revenue-raising measures to narrow the fiscal deficit, control the debt burden and at least stabilize debt sustainability.
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