Fitch cuts Kenya’s credit rating after Moody’s downgrade
TLDR
- Fitch downgrades Kenya's sovereign rating to 'B-' from 'B' due to fiscal risks post abandonment of $2.7 billion tax measures.
- Government implements spending cuts to address fiscal deficits after dropping Finance Bill 2024 tax plan following deadly protests.
- Fitch highlights Kenya's low foreign exchange reserves below 'B' median, attributing it to high external borrowing costs posing risks to external financing.
Global credit ratings agency Fitch has downgraded Kenya’s sovereign rating to ‘B-’ from ‘B’ due to heightened fiscal risks to Kenya’s public finances after the government dropped tax measures in the Finance Bill 2024. It follows a similar downgrade by counterpart Moody's.
The plan to raise an additional $2.7 billion in the Finance Bill 2024, following a recommendation by the International Monetary Fund (IMF), was abandoned after deadly protests.
In response, the government announced spending cuts to cover the fiscal deficits. Fitch notes that Kenya's foreign exchange reserves fall below the ‘B’ median, primarily due to high external borrowing costs, which pose a greater risk to external financing.
Key Takeaways
The ratings firm anticipates a widening of Kenya's fiscal deficit to 4.7 percent of GDP in the financial year ending June 2025 (FY25), which is 0.5 percentage points higher than the government’s revised deficit plan. This plan was adjusted up by 0.9 percentage points in the July draft supplementary budget. The inadequacy of revenue has led to more expensive borrowing from external commercial creditors and the domestic market, with average yields on short-term government papers surging. This reflects higher central bank rates and domestic liquidity constraints. However, Fitch has maintained a stable outlook for Kenya due to the continued strong support from official creditors, which will help alleviate near-term external liquidity pressures. Despite this support, the sovereign’s funding needs will remain large and are expected to rise.
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