Kenya Faces Mounting Debt Crisis as Credit Ratings Plummet

Kenya’s fiscal landscape has deteriorated significantly, with global credit ratings agency S&P downgrading the country’s sovereign credit rating to “B-” from “B.”

This marks the third such downgrade since June, following similar actions by Fitch and Moody’s. Moody’s downgraded Kenya’s credit rating to junk status in July, while Fitch downgraded Kenya’s sovereign rating to “B-” from “B” in August.

Source: Moody’s Ratings, Fitch Ratings, S&P Global

The downgrading decision underscores the financial challenges facing Kenya, raising serious concerns about its future economic stability and debt management. It is a direct consequence of President William Ruto’s decision to abandon the Finance Bill 2024, which aimed to generate Ksh346 billion through new taxes.

This move followed widespread protests that resulted in the tragic loss of over 61 lives, highlighting the mounting public unrest and social pressure the government faces in its efforts to consolidate its fiscal position.

S&P’s downgrade reflects a growing scepticism about Kenya’s ability to stabilize its economy in the medium term.

S&P stated, “The downgrade reflects our view that Kenya’s medium-term fiscal and debt outlook will deteriorate following the government’s decision to rescind all tax measures proposed under the 2024/2025 Finance Bill.”

The rating cuts have put Kenya under intense international scrutiny, raising alarms about the government’s fiscal management and its capacity to service its substantial debt load.

Despite a “stable” outlook maintained by S&P, suggesting that strong economic growth and continued access to concessional external financing could balance the pressures from high-interest costs and slow fiscal consolidation, the overall economic forecast remains bleak.

The downgrade is likely to have serious repercussions for Kenya’s borrowing costs. Lower credit ratings typically translate into higher interest rates for borrowing, complicating the government’s efforts to finance its budget deficit.

This comes when the government has revised its budget for the 2024/25 financial year, cutting spending and increasing its local borrowing target to cover the wider fiscal deficit.

“Moreover, costly domestic debt service (+23% this fiscal year) and unstable FX reserves could imply a higher risk premium on Kenya,” according to NCBA’s Economics and Research Monthly Economic Report August 2024.  

Kenya’s economic woes are further exacerbated by its heavy reliance on external financing, particularly from institutions like the International Monetary Fund (IMF) and the World Bank.

The IMF is expected to meet in September to approve a $600 million disbursement under Kenya’s $3.6 billion lending programme, which expires in 2025. However, the recent downgrades and the scrapped tax plan may complicate Kenya’s relationship with these creditors.

Despite the government’s efforts to mitigate the situation, including a revised budget that scales back spending, the outlook remains grim. The discarded tax measures were a key component of the IMF-supported programme to address Kenya’s fiscal imbalances.

The backtracking on these measures has not only led to credit downgrades but has also cast doubt on the government’s commitment to fiscal discipline.

The downgrades by S&P, Fitch, and Moody’s collectively paint a picture of a nation on the brink of a fiscal crisis. With rising borrowing costs and a limited capacity to introduce new revenue measures, Kenya’s path to economic recovery appears increasingly uncertain.

“The government is, therefore, yet to streamline new strategies put in place to improve revenue collection such as expanding the revenue base and sealing tax leakages, and suspension of tax relief payments and reduction of tax expenditure,” said Cytonn Investments on the performance of the National Treasury gazetted the revenue and net expenditures for the first month of FY’2024/2025, ending 31st July 2024.

“The coming months’ revenue collection performance will largely depend on how quickly the country’s business climate stabilizes, and the measures the government will put in place to cover for the revenue collection measures lost in both the Finance Bill of 2024 and Finance Act of 2023, which was declared unconstitutional by the courts.”

Kenya’s debt burden, already heavy, could become unsustainable if current trends continue, forcing the government to make difficult choices that could have lasting impacts on its economy and its people.

The situation is further complicated by Kenya’s structurally large external imbalances, which remain a key vulnerability according to S&P.

“Although immediate external liquidity pressures have receded slightly, Kenya’s structurally large external imbalances remain a key vulnerability,” S&P added.