Moody's has downgraded Kenya's credit rating, here’s what that means for the country

Global rating agency Moody's recently downgraded Kenya's credit rating, painting a bleak picture of the country's economic status in terms of fulfilling debt obligations. 

The country moved from B3 rating, whereby the country's debt obligations are speculative and subject to high credit risk, to Caa1 rating, whereby the obligations are poor and subject to 'very high credit risk.'

Moody's attributed the downgrade to Kenya's inability to effect fiscal consolidation measures that would lower the risk of defaulting.

The agency also projected that the government would not be able to introduce more revenue raising measures due to heightened social tensions following the Gen Z protests that have rocked the country in the past month.

In this piece, Citizen Digital delves into the credit rating, how it's done, and its implications on a country's projected outlook. 

What does Moody's do?

Moody's is a New York based company that rates the creditworthiness of corporates and governments. It uses Moody's Analytics, a software that provides data to enable investors make sound decisions. It was founded in 1909 by John Moody, an American financial analyst who also pioneered the rating of bonds.

How is the credit rating calculated?

When rating countries, Moody's considers several factors such as industry trends, regulatory environment, geopolitical factors, financial ratios, cash flow, debt levels, market position and management quality.

Types of Ratings

Moody's ratings reflect the likelihood that a country may default and any financial loss suffered in the event of a default.

The highest rating is Aaa whereby a country's obligations are of minimal risk and of the highest quality. 

It drops down to C whereby the country has already defaulted with little chances of recovery. 

Implications for Kenya

A lower grade for Kenya means that the global agency projects that Kenya is at a higher risk of defaulting on its debt obligations owing to financial uncertainty. The rating also raises concerns over the country's ability to manage debt and economic policies effectively.

To an average Kenyan, a downgrade will affect them in the long term owing to disruption of ease of doing business. A lower rating means that the borrowing costs for both the government and private entities is projected to increase. In turn, this means that interest rates on loans could hike leading to a tougher economy for Kenyans grappling with the cost of living.

Investors will also become wary of a lower rating and may opt to pour their funds in other markets.

The government's capacity to raise funds for developmental projects may be hindered owing to the concern arising from the credit rating.

The credit rating means that the government should opt for ways to maintain a fiscal balance to create a conducive business environment.