Fitch Ratings has downgraded Kenya’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’, while maintaining a Stable Outlook.
This downgrade highlights the growing risks to Kenya’s public finances and reflects several critical factors impacting the nation’s economic stability.
Heightened Financial Risks
The downgrade by Fitch Ratings comes in the wake of the Kenyan government’s decision to retract revenue measures included in the Finance Bill 2024, a move triggered by widespread violent social protests.
The increase in domestic debt costs, coupled with this backtrack, has raised alarms over the country’s fiscal health.
Despite efforts to cut expenditure, Fitch notes a moderately increased risk to external financing, exacerbated by elevated external commercial borrowing costs and foreign-exchange reserves that are below the ‘B’ median.
Stable Outlook Amid Fiscal Challenges
Despite the downgrade, Fitch maintains a Stable Outlook for Kenya. The rating agency anticipates that robust support from official creditors will help mitigate immediate external liquidity pressures. However, Fitch also acknowledges that Kenya’s funding needs will remain substantial and are expected to increase.
The tightening of monetary policy is projected to anchor inflation and support the Kenyan shilling. Nonetheless, achieving fiscal targets is becoming increasingly challenging for the authorities.
Socio-Political Turmoil
The socio-political landscape in Kenya has been marked by violent protests in response to proposed tax hikes in the Finance Bill 2024 and calls for governance reforms.
Also Read: Fitch Ratings downgrades Kenya’s Credit Rating to Negative
President William Ruto’s decision to withdraw the bill and his efforts to form a broad-based government after dismissing the previous cabinet in July 2024 have aimed to address these issues.
However, Fitch warns that the risk of prolonged social unrest persists, complicating the environment for fiscal consolidation and posing downside risks to economic activity.
Wider Fiscal Deficit and Rising Debt
Fitch projects a widening of Kenya’s fiscal deficit to 4.7% of GDP for the financial year ending June 2025 (FY25), which is 0.5 percentage points higher than the government’s revised plan.
The withdrawal of planned revenue measures, coupled with higher debt servicing and social spending costs amid civil pressures, are major contributors to this deficit. Revenue is expected to continue underperforming, with only a modest narrowing of the deficit to 4.3% of GDP in FY26.
Fiscal slippage remains a concern, with the FY24 budget deficit reaching 5.6% of GDP, 1.2 percentage points higher than budgeted. This was due to higher spending and shortfalls in tax revenue.
Additionally, revenue shortfalls have led to increased reliance on more expensive borrowing from external commercial creditors and the domestic market, with rising interest payments projected to reach 31.7% of revenue in 2025 and 32.8% in 2026, significantly higher than the median forecast for ‘B’ category peers.
Debt Levels and Economic Outlook
Kenya’s government debt-to-GDP ratio rose to nearly 72% in FY23, up from 67% in FY22, partly due to currency depreciation. Fitch estimates a decline in the debt-to-GDP ratio to 66.4% in FY24, linked to a stronger shilling in the latter half of FY24.
The ratio is expected to decline marginally to 65.6% by the end of FY26, driven by strong nominal GDP growth. However, this remains above the projected 2025 ‘B’ median of 51.5%.
In conclusion, while Kenya faces significant fiscal and socio-political challenges, the country’s ability to navigate these issues will be crucial in determining its economic trajectory. The Fitch downgrade underscores the need for effective fiscal management and socio-political stability to ensure long-term economic health.
