Moody's downgrades Kenya after rejection of Ruto's Finance Bill 2024

Public debt

A junk rating means it is highly speculative, and has a high chance of default in case of a shock.  

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Global rating agency Moody's on Tuesday downgraded Kenya's credit rating, citing the country's inability to implement austerity measures due to the withdrawal of the unpopular Finance Bill 2024.  

The downgrade means Kenya’s local-and-foreign-currency debt obligations has moved further down in the junk territory, from “B3” to “Caa1.”

A junk rating means it is highly speculative, and has a high chance of default in case of a shock.  

The downgrade means the country’s debt obligations have moved from being “speculative” and subject to “high credit risk” to being “of poor standing” and subject to “very high credit risk.”

Ghana, which has since defaulted on its debt obligation and is currently undertaking a restructuring, was also downgraded to “Caa1” by Moody’s in June.

President William Ruto was forced to reject the Finance Bill 2024 following violent riots against the revenue-raising draft law which sort to introduce taxes on cars, money transfers and bread.

 The government has instead opted to cut its tax collection target for the fiscal year ending June 2025 by Sh177 billion, even as it announced several budget cuts.  

"The downgrade of Kenya's rating reflects significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend," said Moody's in a credit rating assessment released on Tuesday.  

Moody's poured cold water on Kenya's ability to pursue fiscal consolidation and austerity measures by cutting expenditure, noting that a big chunk of the spending items, which includes largely debt payments, are not discretionary, which means they have to be paid.  

The credit agency noted that while there is still some room to further cut development spending, the country seemed to have reached a dead end— noting any further cuts will result in reduced growth.

Moody's also maintained Kenya's credit outlook in the negative, which means it is likely to downgrade the rating further down should the country fail to implement measures aimed at avoiding a debt default or restructuring of its debt.  

"The negative outlook reflects downside risks related to government liquidity," said Moody's.  

Moody's noted that a downgrade would occur if Kenya were to face difficulty meeting its funding needs at manageable costs.

"Reduced access to external financing or an increase in the cost of borrowing that impairs the government's ability to meet its fiscal financing needs and debt repayment obligations would likely lead to a downgrade."

Investors rely on credit rating agencies to make investment decisions. Countries with lower credit rating, including a junk rating like Kenya’s, suffer a liquidity squeeze.  

While questioning the credibility of these credit ratings due to their wide variance, Kenya has also been keen to improve its rating by undertaking fiscal consolidation and improving its export earnings.

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