Global ratings agency Moody’s has revised Kenya’s outlook to positive from negative, saying the liquidity and debt affordability concerns that caused a rating downgrade in July 2024 have eased due to falling domestic interest rates.
The government’s domestic financing costs — interest rates on Treasury bills and bonds — have fallen over the last few months after the Central Bank of Kenya (CBK) cut its base rate from 13 per cent in August 2024 to 11.25 per cent in December.
Revenue collection efforts have also been helped by the passage of the Tax Laws (Amendment) Act 2024 in December, which reintroduced some of the tax changes that had been discarded with the cancelled Finance Bill 2024.
Positive ratings by global agencies like Moody’s are useful in lowering the cost of external borrowing by the government, and corporates whose risk perception it closely tied to that of the sovereign.
“Domestic borrowing costs have declined significantly since July 2024 amid monetary easing and strong investor appetite at bond auctions. Given low inflation and a stable exchange rate, there is potential for further reductions in domestic borrowing costs as past monetary policy rate cuts pass through to lower long term borrowing costs,” said Moody’s.
“Revenue collection efforts, if successful, present potential for further improvements in debt affordability, although Kenya has struggled to expand revenue significantly and durably in the past, notwithstanding recent measures.”
However, despite the positive outlook, Moody’s has kept Kenya’s credit rating unchanged in junk territory at the "Caa1" level, citing still elevated credit risks due to a high budget deficit relative to funding options.
The agency downgraded Kenya to Caa1 from B3 last July in the aftermath of the June protests that forced the government to withdraw its Finance Bill which was to raise additional tax revenue of Sh346 billion.
Fellow ratings agency Fitch also downgraded Kenya’s rating in August 2024 from “B” to “B- with a negative outlook”.
In terms of ratings, high quality or investment grade debt is typically in the “A” range, with more speculative credits rated around “B”, while riskier bonds with a higher risk of default, known as junk, assigned a “C” rating or lower.
A junk rating means that a country’s debt obligations are highly speculative, with a high chance of default in case of a shock.
In keeping the rating unchanged despite the improving outlook on borrowing costs, Moody’s said that Kenya has historically struggled to stabilise its debt burden, and stabilise its debt ratios which would help in long term fiscal consolidations efforts.
“Kenya’s fiscal policy effectiveness is (also) constrained by relatively weak institutions, policy unpredictability and high levels of corruption. Moreover, Kenya’s still elevated financing needs continue to pose liquidity risks,” Moody’s added.
The agency added that there is potential for a ratings upgrade down the road should the domestic financing conditions improve further, and fiscal consolidation measures show signs of success, which would affirm investor confidence and tangibly lower liquidity risks in the economy.
On the domestic front, the CBK’s monetary policy committee is set for its first meeting of 2025 on February 5, where analysts expect a further rate cut — primarily to boost private sector lending growth — which will expectedly lower the rates on government securities.
However, should domestic and external financing conditions fail to improve sufficiently, the outlook will be changed from positive to stable. Given the positive outlook though, a ratings downgrade in the near term is unlikely.
