Kenya's Credit Rating Was Downgraded to 'B-' Amid Fiscal and Debt Challenges

On August 23, 2024, S&P Global Ratings downgraded Kenya’s long-term sovereign credit rating to ‘B-’ from ‘B’, while maintaining a stable outlook. This decision reflects concerns over the country’s fiscal and debt trajectory, which has weakened due to recent policy shifts and ongoing economic pressures. The downgrade also marks a critical point in Kenya’s fiscal management, as the government faces growing challenges in balancing its budget, addressing mounting debt obligations, and securing external financing.

Factors Behind the Downgrade

S&P’s decision to lower Kenya’s rating comes after the government’s abrupt repeal of key provisions in the 2024/2025 Finance Bill, which had initially aimed to implement tax hikes on essential goods such as bread, cooking oil, and car ownership. The repeal followed widespread protests that reflected the public’s opposition to the proposed tax increases, amid an ongoing cost-of-living crisis. While the government did introduce a supplementary budget focusing on expenditure cuts, it has also revised its fiscal outlook for the year. The overall budget deficit is now projected to widen to 4.3% of GDP for the fiscal year ending in June 2025, up from 3.3% under the original budget.

This fiscal slippage is expected to result in higher borrowing needs, which will likely drive up interest payments on government debt. Debt servicing costs are projected to continue exceeding 30% of government revenue over the period from 2024 to 2027, a situation that places Kenya among the most highly indebted sovereigns globally.

Debt and Liquidity Concerns

Despite the fiscal setbacks, Kenya has managed to avoid immediate external liquidity risks, largely due to strong access to concessional external financing. The government also successfully refinanced its Eurobond due in June 2024, alleviating some short-term refinancing pressures. However, Kenya’s large external debt burden remains a major vulnerability. The country is projected to face around $2 billion in external debt amortizations annually between FY 2025 and FY 2027, with a significant portion of that related to Eurobond repayments.

Kenya’s external financing options include potential issuances of sustainability-linked bonds, Samurai bonds, Sukuk, and Panda bonds. Additionally, the government expects continued disbursements from multilateral institutions such as the IMF and the World Bank. However, the success of these efforts will depend on the government’s ability to maintain investor confidence and secure favorable terms in an increasingly challenging global financing environment.

Economic Outlook and Stability

Despite the fiscal and debt challenges, S&P maintained a stable outlook for Kenya. This reflects expectations of robust economic growth and continued access to concessional external financing, which should help cushion the impact of rising interest costs and slower fiscal consolidation. Kenya’s diversified economy, strong private sector, and ongoing growth in key sectors such as agriculture and services are seen as positive factors supporting the country’s long-term economic prospects.

Moreover, Kenya benefits from a relatively flexible monetary policy framework and relatively deep domestic capital markets compared to other countries in the ‘B’ rating category. These factors provide some support for the country’s financial stability, even in the face of fiscal and external imbalances.

Risks and Challenges Ahead

The stable outlook, however, comes with significant risks. S&P indicated that it could downgrade Kenya’s rating further if there is a deterioration in the country’s external or domestic liquidity, particularly if foreign exchange reserves continue to decline or if there are signs of distress in debt restructuring operations. Furthermore, the agency warned that continued delays in fiscal consolidation—especially if interest costs rise further—could also lead to a downgrade.

On the flip side, S&P noted that Kenya’s credit rating could be upgraded if the country successfully reduces its external and domestic financing pressures or makes significant progress in fiscal consolidation through reforms in revenue generation and public expenditure management.

Conclusion

Kenya’s downgraded credit rating to ‘B-’ underscores the challenges the country faces in managing its fiscal and debt situation. While the government has taken steps to secure external financing and implement expenditure cuts, the repeal of key tax measures has complicated efforts to stabilize the fiscal outlook. The country’s relatively high debt servicing burden, combined with structural external imbalances, means that Kenya must take decisive steps to improve fiscal management and debt sustainability in the coming years.

While Kenya’s economic growth potential remains strong, the path to fiscal stability will require significant reforms and continued discipline in managing both domestic and external financing needs. As Kenya navigates these challenges, maintaining access to concessional financing, controlling interest costs, and progressing toward fiscal consolidation will be key to ensuring the country’s financial resilience in the medium to long term.