Another global credit ratings agency has affirmed Kenya’s long-term foreign-currency Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook after Moody’s Ratings (Moody’s) revised the country’s credit outlook and changed it from negative to positive. Fitch Ratings issued a statement on January 31, 2024, stating Kenya’s ‘B-‘rating reflects strong medium-term growth prospects, a diversified economy and a recent strengthening of the monetary policy framework.
The Organization said the rating is constrained by weak governance, high debt servicing costs and a significant level of informality constraining government revenues.
Besides, Fitch listed high external indebtedness underpinned by challenges to fiscal consolidation, despite increased efforts to narrow the budget deficit as other factors.
Fitch Ratings Explains Kenya’s Stable Outlook
It explained that the stable outlook reflects its expectation that continued strong official creditor support will help alleviate near-term external liquidity pressures.
However, Fitch said the sovereign’s funding needs will remain large and are expected to rise.
“These pressures have eased following the February 2024 Eurobond issuance and buyback of USD 1.44 billion of a USD2 billion Eurobond that was set to mature on 24 June 2024 in February,” Fitch said.
The Agency explained that the strong official disbursements and remittances have contributed to recent currency appreciation (22% against the US dollar in 2024), moderating the external debt servicing burden, as about 55% of the government’s debt is foreign currency denominated.
Fragile Socio-Political Climate
Additionally, Fitch said the socio-political tensions have eased following the government’s withdrawal of the Finance Bill 2024, which had proposed tax hikes that sparked violent social protests in June-July 2024.
The agency highlighted that President William Ruto has since formed a broad-based government and improved public engagement to enhance understanding of the importance of the fiscal consolidation strategy.
“However, we view the risk of renewed social unrest as high over the short term due to persistent socio-economic challenges, complicating fiscal consolidation efforts and posing risks to economic activity,” Fitch stated.
Moderating Financing Pressures
Fitch predicts that Kenya’s gross external financing needs will decline to 6.3% of GDP in 2025, from 7.5% of GDP in 2024.
It attributed this to projected lower fiscal deficit and debt amortization and improved external liquidity.
Government external debt service (including amortization and interest) is expected to moderate in the fiscal year ending June 2025 (FY25) to USD 4.1 billion (3.1% of GDP), from USD 5.4 billion (4.6% of GDP) in FY24.
However, Fitch said this will exceed USD5 billion in FY26 through to FY29, sustaining large financing needs.
Further Fiscal Slippage
Besides, Fitch anticipates further slippage, with the budget deficit reaching 4.8% of GDP in FY25, 1.5pp higher than the government’s initial budget target and 0.4pp above its revised target.
“Notwithstanding efforts to cut spending, we expect expenditure to remain high, driven by higher debt servicing, increased social spending amid civil pressures, and new spending pressures from collective bargaining agreements,” the Agency said.
The government plans to reduce expenditure by 0.6% of GDP to offset some of its withdrawn revenue-raising measures (estimated at nearly 2% of GDP).
Fitch assumes that the deficit will be financed through a mix of domestic and foreign borrowing, with nearly 60% sourced domestically, sustaining high-interest costs, and shortening maturities.
Strong Creditor Support
The Agency said the government plans to secure about USD5 billion (nearly 4% of GDP) through official and commercial borrowing in FY25.
Half of this will be sourced from multilateral creditors, including the final USD0.9 billion disbursement from the IMF programme ending in April 2025.
It also plans to issue a sustainability-linked bond, although details are unclear. The expiration of the IMF arrangement introduces uncertainty over subsequent financing flows. Fitch anticipates that negotiations will lead to a new funding arrangement, but the timeline is uncertain.
Also Read: AU Body Disagrees with International Investors Over Kenya’s Debt Status
Revenue Constraints to Persist
Further, the Agency said the government proposes that additional tax measures will contribute about 0.3%-0.4% of GDP to revenue in FY25.
However, it maintains a conservative revenue outlook due to its expectation of revenue shortfalls consistent with Kenya’s record of underperformance and gaps in public financial management.
“Underperformance in revenue continued in 1HFY25, which we estimate at 6.4% below target on a pro-rata basis,” Fitch said.
Also Read: Kenya’s Credit Outlook Revised to Positive, Rating Affirmed Ahead of Finance Bill 2025
AU Dismisses Moody’s Rating
Moody’s, revised Kenya’s credit outlook from “negative to positive citing potential ease in liquidity risks and improving debt affordability over time for the decision.
However, Moody maintained that the local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings still stand at CAA1.
This rating was disputed by the African Peer Review Mechanism (APRM), an agency of the African Union (AU).
APRM said Moody’s review was irresponsible, since it revised the rating from negative to positive, skipping the stable outlook.
The AU Agency said Moody’s decision leads to unnecessary costs to governments, triggering Eurobond sell-offs, and sustaining a negative sentiment on African instruments.
“The APRM notes with concern the errors in recent credit rating actions by Moody’s. On 24 January 2025, Moody’s changed Kenya’s outlook from ‘negative’ to ‘positive’ and reaffirmed its Caa1 rating, citing a potential ease in liquidity risks and improving debt affordability over time. It is rare for a credit rating agency to move from ‘negative’ to ‘positive’, skipping a ‘stable’ outlook.” APRM said.
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