US ratings agency Fitch Ratings has sounded the alarm for Kenya’s economy, downgrading its Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’. This stark reassessment points to growing concerns over the nation’s public finances, political instability, and rising domestic debt costs.
The move comes in the wake of the government’s retreat from planned revenue measures amidst violent social protests, adding another layer of uncertainty to Kenya’s economic future. The downgrade reflects heightened risks to Kenya’s public finances, largely driven by political instability and rising domestic debt costs.
“The downgrade reflects heightened risks to Kenya’s public finances after the government backtracked on revenue measures in the Finance Bill 2024,” Fitch stated in a statement, adding that the outlook was “stable”.
The government’s backtracking on the Finance Bill 2024, following fierce public opposition, has exacerbated fiscal pressures, despite efforts to cut expenditures.
– Advertisement –
Additionally, Fitch sees a moderate increase in external financing risks, partly due to elevated external borrowing costs and dwindling foreign-exchange reserves, which are now below the ‘B’ median.
Despite these challenges, Fitch maintains a stable outlook for Kenya, citing strong support from official creditors that is expected to ease near-term external liquidity pressures. However, the nation’s funding needs are substantial and likely to grow, posing a significant challenge.
– Advertisement –
Tightened monetary policy is anticipated to keep inflation in check, providing some support for the currency, while the authorities strive to adhere to their fiscal consolidation agenda, albeit under increasingly difficult conditions.
The socio-political landscape in Kenya has become more volatile. Violent protests against tax hikes and calls for governance reforms have escalated, complicating efforts towards fiscal consolidation. President William Ruto’s response has been to withdraw the contentious Finance Bill and attempt to form a broad-based government.
Despite these measures, the risk of prolonged unrest remains high, posing significant threats to economic stability and growth. Fitch projects a widening of the fiscal deficit to 4.7 per cent of GDP for the fiscal year ending June 2025, up from the government’s revised target.
This widening deficit is attributed to the withdrawal of planned revenue measures and increased costs related to debt servicing and social spending. Revenue performance is expected to continue lagging behind targets in the coming years, with only a modest reduction in the deficit projected.
Kenya’s fiscal pressures are compounded by rising interest payments and higher borrowing costs. Shortfalls in revenue have led to greater reliance on expensive external commercial creditors and domestic borrowing.
As a result, the government’s interest payments are projected to consume 31.7 per cent of revenue in 2025, rising to 32.8 per cent in 2026, significantly higher than the median for ‘B’ rated peers argues Fitch.
The nation’s debt levels remain alarmingly high, with government debt reaching nearly 72 per cent of GDP in Financial Year 2023. This was partly due to currency depreciation, although a stronger shilling in the second half of FY24 has helped reduce the debt ratio slightly. Fitch expects the debt/GDP ratio to decline marginally but remain above the projected median for ‘B’ rated countries.
External financing challenges also loom large. Kenya’s external debt service obligations will moderate slightly in FY25 but will remain substantial in the following years. The government aims to secure significant foreign financing, including from official creditors and project loans, but Fitch views these targets as overly ambitious and expects shortfalls in securing commercial funding.
Fitch notes that the recent fiscal adjustments complicate adherence to targets agreed with the International Monetary Fund (IMF), with the expiration of the current IMF arrangement in April 2025 adding further uncertainty.
The current account deficit is projected to widen due to a recovery in imports and high external debt obligations, while gross reserves are expected to decline, providing less coverage for external payments compared to peer countries.
Public financial management shortfalls are evident, with significant outstanding public sector arrears highlighting ongoing challenges. The government’s efforts to verify and clear these arrears face obstacles due to revenue constraints and insufficient controls to reduce leakages, ensuring that pending bills remain high in the near term.
Kenya’s rating fundamentals are bolstered by ongoing reforms and strong medium-term growth prospects. Fitch forecasts GDP growth to average 5.4 per cent over 2025-2026, above the median for ‘B’ rated countries. However, weak governance, rising interest payments, a narrow revenue base, and high external indebtedness constrain the rating.
Read the Original Article on https://www.kenyans.co.ke/
US Rating Agency Fitch Downgrades Kenya’s Credit Rating to B-
