Kenya credit rating upgrade set to boost Treasury debt strategy

In a significant boost for the Kenya Kwanza government, global ratings agency Moody’s Investors Service has upgraded the country’s credit outlook from negative to positive. 

This change announced yesterday reflects improvements in debt affordability and a reduced likelihood of liquidity risks by Kenya, the agency said.

Moody’s assessment suggests an increased confidence in Kenya’s creditworthiness over time, potentially enhancing the government’s access to global capital markets at a time the Ruto government plans to borrow hundreds of billions of shillings from local and international markets to plug budget shortfalls.

The credit outlook upgrade is now expected to boost investor confidence in Kenya, facilitating better access to international capital markets.

However, Moody’s cautioned that maintaining fiscal discipline and addressing the high debt burden remain critical.

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The ratings agency reaffirmed Kenya’s long-term foreign-currency and local-currency issuer ratings at “Caa1,” indicating a high level of credit risk.

According to Moody’s, the positive outlook is driven by a growing expectation that Kenya’s liquidity risks will ease and debt affordability will improve.

It pointed to a recent decline in domestic borrowing costs, attributed to monetary easing, with prospects for further reductions as the government continues its fiscal consolidation efforts.

“Improved domestic financing conditions signify easing government liquidity risks and will gradually enhance debt affordability,” Moody’s said.

However, it noted that the immediate effects on debt affordability may be limited due to the government’s front-loading of financing for the 2025 fiscal year.

Moody’s also praised the government’s recent success in passing tax legislation aimed at broadening the tax base and enhancing revenue collection.

“This proactive approach to fiscal consolidation underscores a commitment to improving revenue streams,” it said.

Despite acknowledging significant challenges—including high corruption levels, weak institutions, and substantial environmental and social risks—the rating agency recognised Kenya’s economic resilience and growth potential.

“Kenya’s economy is notably larger and has grown more rapidly than its Caa-rated peers, exhibiting lower volatility,” it added.

The cash-strapped Kenya Kwanza government is considering issuing Eurobonds in 2025 to manage its maturing debt, as outlined in recent budget documents.

The fiscal deficit, including grants, is projected to reach Sh759.4 billion (3.9 per cent of GDP) in the 2025-26 financial year, a slight decrease from the anticipated Sh768.6 billion (4.3 per cent of GDP) for 2024-25.

Financing for the upcoming fiscal year’s deficit will come from Sh213.7 billion (1.1 per cent of GDP) in net external financing and Sh545.8 billion (2.8 per cent of GDP) in net domestic financing.

“To curb debt accumulation and reduce debt service in the medium term, the government will sustain its fiscal consolidation efforts,” the National Treasury said in the draft 2025 Budget Policy Statement published earlier this month.

The government’s economic blueprint for emphasises diversifying funding sources, including exploring international capital markets while prioritising debt sustainability.

As at September last year, Kenya’s public debt stood at Sh10.79 trillion. Between 2025 and 2026, the country is expected to repay over Sh1.5 trillion ($11.58 billion) to foreign creditors, highlighting a significant debt burden.

In addition to Eurobonds, Kenya is considering other financing options, such as green and climate change financing, contingent on favourable economic conditions.

The government is also looking to tap into new markets through the potential issuance of Panda (Chinese) and Samurai (Japanese) bonds as part of its strategy to diversify funding sources and address deficits.

“The government will explore additional financing avenues, including green and climate change options, as macroeconomic conditions improve,” the Treasury document said.

It aims to maximise loans on concessional terms while limiting non-concessional and commercial external borrowing to essential projects aligned with its development agenda that cannot secure concessional financing.

The National Treasury plans to mobilise resources from both domestic and external sources to meet borrowing requirements, with external funding coming from multilateral, bilateral, and commercial lenders, while domestic financing will rely on Treasury bonds and bills.

“In our approach, we will prioritise concessional loans, but non-concessional and commercial borrowing will be restricted to projects that align with our development goals and cannot access concessional financing,” Treasury said.

The assessment comes at a time the World Bank and the International Monetary Fund (IMF) have recently urged the Ruto government to rein in its public debt and adhere to fiscal discipline in order to mitigate vulnerabilities and ensure sustainable economic growth.

In a new report published this week, the World Bank emphasised the need for Kenya to reduce its debt burden to 55 per cent of GDP by 2029, a significant cut from current levels measured in present value terms.

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The report outlined a strategic framework for the government, calling for a multifaceted approach that includes increased domestic revenue mobilization, expenditure rationalisation, and growth-enhancing measures.

The bank highlighted the necessity of refining systems related to cash management, public procurement, wage bills, and public investment management.

“The Kenya government must reduce debt vulnerabilities and bring down the debt burden to 55 per cent of GDP by 2029 from the current level (measured in present value terms), consistent with Kenya’s debt anchor, through continued domestic revenue mobilisation, expenditure rationalisation, and growth-enhancing measures,” said the World Bank.

Other proposed measures are to improve the efficiency, transparency, and accountability of public spending.

“(The government needs to) boost domestic revenues and improve the progressivity of tax policy implement the Medium-Term Revenue Strategy (MTRS) to expand the revenue base, improve tax compliance, and reassess current tax instruments,” the report said.

“This should be coupled with improvement in the progressivity and fairness of the tax policy.”