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Moody’s Downgrades Kenya’s Credit Rating to Caa1

Moody’s Ratings downgraded Kenya’s credit rating from B3 to Caa1 on July 8, 2024, indicating significant concerns about the country’s financial stability and debt management capabilities.

Kenya’s government faced widespread protests and subsequently abandoned planned tax increases included in the 2024 Finance Bill, which were intended to raise KES 346 billion (1.9% of GDP). Instead, the government opted for a KES 177 billion spending cut and increased borrowing, shifting away from revenue-based strategies.

Moody’s warns that relying on spending cuts over tax increases could adversely affect Kenya’s debt affordability. The projected fiscal deficit for 2025 now stands at 4.6% of GDP, significantly higher than the initial 3.3% target.

The downgrade suggests heightened financial risks if Kenya fails to implement effective fiscal measures. It reflects doubts about the government’s ability to raise revenue and manage its growing debt burden.

With a larger fiscal deficit, Kenya will need more funding, potentially increasing borrowing costs and liquidity risks. Moody’s negative outlook implies worsening conditions if fiscal measures prove inadequate.

The downgrade also reflects concerns about managing external debt and financial stress. Kenya’s local currency ceiling was lowered to B1 from Ba3, citing weak institutions and policy unpredictability.

Kenya’s downgrade places it below neighboring countries on the ratings scale. Tanzania holds a B1 rating with a positive outlook as of March 2024, while Uganda maintains a B3 rating with a stable outlook as of May 2024.

Moody’s latest ratings downgrade for Kenya takes it below Tanzania and Uganda (Source: Moody’s)

Kenya faces a challenging path ahead as it navigates fiscal pressures and seeks to restore economic stability. The cancellation of tax measures complicates fiscal policy, potentially jeopardizing IMF support crucial for external financing.

The government’s commitment to fiscal reforms and restoring investor confidence will be pivotal in stabilizing Kenya’s economy amidst these challenges.

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