More debt pain for Kenyans after latest Moody's credit downgrade

The government is facing higher borrowing costs after the global rating agency Moody’s downgraded Kenya’s credit rating. 

Moody’s cut Kenya’s rating to Caa1 from B3, citing a major worsening of its fiscal situation even as it issued a negative outlook. 

The agency said Kenya’s ability to increase revenues and make its debt more affordable has declined significantly. 

Moody’s pointed to the government’s decision to cancel planned tax increases in the Finance Bill, 2024 following the Gen Z protests and instead rely on spending cuts to reduce the fiscal deficit.  

This policy shift “has major implications for Kenya’s finances and borrowing needs,” the agency said. 

“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 particular, the government’s decision not to pursue planned tax increases and instead rely on expenditure cuts to reduce the fiscal deficit represents a significant policy shift with material implications for Kenya’s fiscal trajectory and financing needs.” 

Interest rates

The downgrade and negative outlook mean the government has to pay higher interest rates when it borrows money, both domestically and internationally.  

This is a challenge as Kenya is already dealing with high domestic borrowing costs, even as inflation has eased and the Shilling has strengthened. 

“We expect domestic borrowing costs will gradually decline, but debt affordability will remain weaker for longer due to larger deficits, lower revenue, and more reliance on costly domestic financing,” Moody’s said. 

The agency expects Kenya’s interest payments as a share of revenue to rise to 33 per cent in the 2025 fiscal year, up from 30 per cent previously. This “indicates significant fiscal constraints” for the government. 

The higher borrowing costs will make it harder for Kenya to service both its domestic and foreign debt. The downgrade also risks limiting the country’s access to external funding, including from multilateral lenders. This high-cost borrowing environment is a major challenge for President Ruto’s administration.

The government must balance fiscal consolidation with maintaining social stability, but with limited options to raise revenues, it may have to rely more on expensive domestic and foreign financing. 

“In the context of heightened social tensions, we do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future,” Moody’s said. 

“As a result, we now expect the fiscal deficit to narrow more slowly, with Kenya’s debt affordability remaining weaker for longer. In turn, larger financing needs stemming from a wider deficit increase liquidity risk against more uncertain external funding options.” 

Moody’s said larger financing needs and an increase in borrowing costs would amplify liquidity risks.  

“In particular, slower fiscal consolidation would risk constraining external funding options even more, including diminishing support from multilateral creditors which have been the largest source of external financing since 2020,” it said. 

Kenya’s previous B3 rating was predicated on the government continuing with a fiscal consolidation strategy that encompassed significant revenue-raising measures that would narrow the fiscal deficit, contain the debt burden and at least stabilize debt affordability.