Kenya’s credit rating downgraded after Finance Bill 2024 rejection

When Moody’s Rating Committee sat a week ago on the second of July, it was Kenya’s debt rating on the table for dissection.

At the end of the meeting, Kenya had moved from B3 status into very high credit risk, which they call Caa1, and with a negative outlook.

This now means that the country’s risk of default is presumed to have gone up.

Economist Johnson Nderi says: “Moody’s is a credit rating agency, a global credit rating agency; they rate sovereign and corporate debt. They are typically a source of information for investors who want to know how creditworthy a sovereign or corporate entity is.”

The decision to downgrade Kenya came shortly after the withdrawal of Finance Bill, 2024, with Moody’s saying it was driven by the country’s diminished capacity to implement revenue-based fiscal consolidation.

This, they say, would have improved debt affordability, placing it on a downward trend.

Moody’s also said that the government’s decision to cut back on expenditure instead of increasing taxes will affect the country’s financing needs.

The global rating agency has also taken note of that the heightened social tensions in the country over the last two weeks, while acknowledging that the government will not be able to introduce significant revenue-raising measures in the foreseeable future.

However, economists say this downgrade has come prematurely.

Odhiambo Ramogi, MD of Elim Capital Ltd, says: “When governments are in the process of making budgets, it is expected that there will be pull and push, especially in our situation where this government has pushed the taxes upwards in the last few months and years. And so, it was expected that there would be feedback in the negative about it. And what you do is you wait it out, and then afterwards you can review with the full information.”

This new rating, and Moody's negative outlook for the country, is likely to further increase borrowing costs for the cash-strapped government.

Should the government opt to shun the international market and borrow domestically, experts say this could lead to an increase in interest rates.

The government is in a catch-22 yet again, with rising debt obligations and an inability to raise more tax revenue. So what options does the government have?

“I think they need to focus on production, they need to put their money where their mouth is. Because if you focus on production in a few months’ time then the revenue will turn around. You see, in agriculture, you only need a few months, but even if we have ourselves one year of good investment in agriculture, at a time like this next year we will not be talking about high inflation, we’ll not be talking about our importation of food, we’ll have significantly affected our balance of payments and affected our currency,” Ramogi added.

Nderi noted: “The government ideally ought to have, to keep spending below tax revenue, so that the additional money can go towards paying down debt. Right now, what we are doing is we are borrowing to pay both interest and principal.”