Moody’s downgrades Kenya’s credit worthiness on Finance Bill withdrawal

Global credit rating firm Moody's has downgraded the country's creditworthiness with a further negative outlook, following the withdrawal of the  Finance Bill.

The firm reduced the county's rating one level down from B3 to Caa1, reflecting a significantly diminished capacity to implement revenue-based fiscal consolidation.

"In the context of heightened social tensions fueled by anti-tax demos, we do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future," Moody's said in a statement on Tuesday.

"It is for this reason we opted for a cut in the rating. Also as a result, we now expect the fiscal deficit to narrow more slowly, with Kenya's debt affordability remaining weaker for longer."

The credit assessor added that in turn, larger financing needs stemming from a wider deficit would increase liquidity risk against more uncertain external funding options. Nevertheless, it reckoned that the tax bill would improve debt affordability and place debt on a downward trend.

"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," it said.

Moody's rates the creditworthiness of companies, governments and fixed-income debt securities in countries globally.

Investors often pay close attention to the ratings it assigns to corporate and government securities for their decision-making.

Ideally, the ratings of long-term corporate obligations go from Aaa, which is the highest grade for top-quality issuers believed to pose the lowest risk, to C, a grade usually given to securities that are already in default and have little chance of the recovery of principal or interest.

The negative outlook for Kenya further reflects downside risks related to government liquidity over the next few years.

"Larger financing needs and/or an increase in borrowing costs would amplify liquidity risks further," Moody's said.

"Our updated forecasts continue to assume a narrowing of the fiscal deficit through spending cuts, but at a more gradual pace than we previously assumed."

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.

Larger financing needs would, as a result, risk reducing domestic appetite for government securities, which would challenge the government's ability to continue servicing domestic debt.