Moody’s downgrades Kenya after Ruto’s 2024 Finance Bill rejected

Moody’s downgrades Kenya after Ruto’s 2024 Finance Bill rejected

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

The downgrade means that Kenya’s local and foreign currency debt obligations are further downgraded into the junk bond category, from ‘B3’ to ‘Caa1’.

A junk rating means that the security is highly speculative and has a high probability of default in the event of a shock.

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

Ghana, which has since defaulted on its debt obligations and is currently undergoing restructuring, was also downgraded to ‘Caa1’ by Moody’s in June.

President William Ruto was forced to reject the 2024 Finance Bill following violent riots against the bill aimed at increasing tax revenue and introducing taxes on cars, remittances and bread.

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

“Kenya’s rating downgrade reflects a significantly reduced ability to implement revenue-led fiscal consolidation that would improve debt capacity and place debt on a downward trend,” Moody’s said in a credit rating assessment released Tuesday.

Moody’s has cast a chill on Kenya’s ability to continue fiscal consolidation and austerity measures by cutting spending, noting that a large portion of the spending items, which largely include debt payments, are non-discretionary, meaning they have to be paid for.

The credit agency noted that while there was still room to further cut development spending, the country appeared to have reached an impasse, noting that any further cuts would lead to reduced growth.

Moody’s also kept Kenya’s credit outlook at negative, meaning it is likely to downgrade the rating further if the country fails to implement measures to avoid a default or a debt restructuring.

“The negative outlook reflects downside risks related to government liquidity,” Moody’s said.

Moody’s noted that a rating downgrade would occur if Kenya had difficulty meeting its financing needs at manageable costs.

“Reduced access to external financing or an increase in the cost of borrowing that would compromise the government’s ability to meet its fiscal financing needs and debt repayment obligations would likely lead to a downgrade of the rating.”

Investors rely on rating agencies to make investment decisions. Countries with low credit ratings, including Kenya, are suffering from a liquidity crisis.

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