Moody’s Ratings has upgraded Kenya’s credit outlook from negative to positive, reflecting improvements in the country’s economic resilience and debt affordability.
However, the rating agency has affirmed Kenya’s long-term issuer and senior unsecured debt ratings at Caa1, to indicate continued presence of significant credit risks.
Positive Outlook Driven by Easing Liquidity Risks
The shift to a positive outlook is attributed to an increasing likelihood of Kenya overcoming its liquidity challenges, supported by improved debt affordability.
Monetary easing has led to a decline in domestic financing costs, a trend that could continue if Kenya sustains effective management of fiscal consolidation and social demands.
Revenue collection, though constrained by historical underperformance, presents potential for further improvement.
This could enhance Kenya’s access to concessional and commercial external funding. However, Moody’s noted that the country still struggles to expand revenue significantly, despite recent efforts.
Key Drivers Behind Kenya’s Caa1 Rating
The affirmation of Kenya’s Caa1 rating underscores elevated credit risks tied to weak debt affordability and high gross financing needs. Moody’s cited the following challenges:
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- Limited Fiscal Policy Effectiveness: High corruption levels and weak institutions hinder revenue collection efforts.
- Liquidity Risks: Kenya continues to face significant liquidity challenges, particularly in light of rising debt servicing costs.
- Environmental and Social Vulnerabilities: Climate-related events and socio-economic challenges pose additional risks.
Despite these challenges, Kenya’s credit strengths include its large, diversified economy and relatively developed capital markets, which enable the government to access long-term domestic debt in local currency.
According to Moody’s, Kenya’s fiscal metrics remain under pressure, with a fiscal deficit of -5.8% of GDP in 2023 and external debt standing at 70.5% of GDP. However, the country has shown economic resilience, supported by:
- A GDP per capita (PPP) of $6,772 in 2023.
- Real GDP growth of 5.6% in 2023.
- A diversified economy that absorbs shocks effectively.
Despite these positive indicators, high inflation (6.6% in 2023) and weak governance—reflected in low wealth levels and high debt burdens—continue to limit Kenya’s overall fiscal strength.
Potential for Upgrades or Downgrades
Moody’s highlighted factors that could lead to an upgrade or downgrade of Kenya’s credit rating:
- Upgrade Potential: Improvement in domestic financing conditions, successful fiscal consolidation measures, and enhanced investor confidence that lowers liquidity risks and improves debt affordability. Access to affordable external financing sources could also boost the rating.
- Risk of Downgrade: A reversal in financing conditions or failure to improve fiscal discipline could lead to a return to a stable or negative outlook. Rising borrowing costs and weaker fiscal metrics could further pressure the country’s creditworthiness.
Governance remains a critical challenge for Kenya’s credit profile. Weak rule of law, limited policy predictability, and high corruption levels constrain fiscal policy effectiveness. These issues, coupled with low human capital development, hinder Kenya’s ability to fully capitalize on its economic potential.
Moody’s positive outlook signals growing confidence in Kenya’s ability to address its liquidity challenges and stabilize its debt profile. However, the affirmation of the Caa1 rating reflects the steep road ahead for fiscal consolidation and governance reforms.
