Kenya’s fiscal health has received a boost after global credit ratings agency Moody’s Ratings (Moody’s) revised the country’s credit outlook and changed it from negative to positive.
Moody’s on Friday, January 24, announced the outlook change but affirmed that the local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings still stand at CAA1.
This comes after a rating committee on Tuesday was called to discuss Kenya’s credit rating.
According to the agency, the change in outlook to positive is driven by the increasing likelihood of Kenya’s liquidity risks easing and debt affordability improving over time.
“Domestic financing costs have started to decline amid monetary easing and could continue to do so if the government sustains its more effective management of social demand and fiscal consolidation. Such a track record would also boost Kenya’s access to both concessional and commercial external funding,” said Moody’s.
“Revenue collection efforts, if successful, present the potential for further improvements in debt affordability, although Kenya has struggled to expand revenue significantly and durably in the past, notwithstanding recent measures.”
The credit rating agency explained that the affirmation of Kenya’s rating reflects still elevated credit risks driven by very weak debt affordability and high gross financing needs relative to funding options.
Moody’s downgraded Kenya’s credit sustainability to CAA1 last year a week after Kenya’s President William Ruto declined to assent the Finance Bill 2024 to law following nationwide protests and public outcry.
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The country moved from B3 rating, whereby the country’s debt obligations are speculative and subject to high credit risk
Moody’s affirms Kenya’s CAA1 credit rating
While explaining the rating affirmation, the agency has revealed that the country’s fiscal policy effectiveness is limited by weak institutions, policy unpredictability, and high consumption levels, hindering revenue collection, according to Moody’s.
Additionally, Kenya also faces significant liquidity risks and environmental and social challenges.
“Supporting Kenya’s rating are fundamental credit strengths including a large, diversified economy that has shown resilience to shocks and benefits from a relatively developed capital and credit markets, enabling the government to issue long-term domestic debt in local currency,” the agency added.
At the same time, the New York-based agency has announced that Kenya’s local currency (LC) ceiling remains at B1, maintaining a three-notch difference with the sovereign rating.
Moody’s explained that this reflects relatively weak institutions and policy predictability, and moderate political risk set against a relatively small footprint of the government in the economy and limited external imbalances.
The foreign currency (FC) ceiling remains at B2, one-notch below the LC ceiling, which reflects relatively mortality rates, which constrain Kenya’s human capital.
“The influence of governance on Kenya’s credit profile (G-4 issuer profile score) captures Kenya’s weak fiscal policy effectiveness as well as high levels of corruption and weak rule of law. Low wealth levels and an already high debt burden limit the degree of resilience,” Moody’s added.
During the rating by Moody’s committee, it was established that Kenya’s economic fundamentals, including its economic strength, have materially increased while its institutions and governance strength, have not materially changed.
On the other hand, Kenya’s fiscal or financial strength, including its debt profile, has materially increased while its susceptibility to event risks has not materially changed.
Rating downgraded
This credit rating review by Moody’s comes seven months after it downgraded it in July last year, citing the country’s inability to implement austerity measures following the withdrawal of the Finance Bill.
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At the time, the downgrade meant Kenya’s local- and foreign-currency debt obligations had fallen further into junk territory, moving from “B3” to “CAA1”.
Junk means it is highly speculative and has a high chance of default in case of a shock.
Moody’s has explained that it would likely upgrade Kenya’s rating if domestic financing conditions improved further and fiscal consolidation measures show signs of success, engendering investor confidence that tangibly lowers liquidity risks, enhances debt affordability and places Kenya’s debt burden on a durable downward trajectory.
“Additionally, the continued resilience of Kenya’s external buffers, coupled with reliable access to diverse and affordable external financing sources, could also lead to an upgrade,” the agency said.
The outlook, on the other hand, would be changed to stable if financing conditions, both domestic and external, fail to improve sufficiently, or worst, reverse, resulting in elevated liquidity risk and debt affordability unlikely to improve.
This could result from rising borrowing costs or a weakening commitment to fiscal consolidation, leading to weaker fiscal deficits and debt metrics than currently expected.
Kenya has at least one default event (on bonds and/or loans) recorded since 1983.
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