Moody's Upgrades Kenya's Rating Outlook to Positive
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Moody’s Ratings has changed the Government of Kenya’s outlook to positive from negative and affirmed the local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings at Caa1.

The change in outlook to positive is driven by the increasing likelihood of Kenya’s liquidity risks easing and debt affordability improving over time, Moody’s said.

The country’s domestic financing costs have started to decline amid monetary easing and could continue to do so if the government sustains its more effective management of social demand and fiscal consolidation.

Moody’s analysts said such a track record would also boost Kenya’s access to both concessional and commercial external funding.

Analysts stated that revenue collection efforts, if successful, present potential for further improvements in debt affordability, although Kenya has struggled to expand revenue significantly and durably in the past, notwithstanding recent measures.

The rating note stated that the affirmation of Kenya’s Caa1 rating reflects still elevated credit risks driven by very weak debt affordability and high gross financing needs relative to funding options.

Moody’s hinted that Kenya’s fiscal policy effectiveness is limited by weak institutions, policy unpredictability, and high corruption levels, hindering revenue collection.

Additionally, Kenya also faces significant liquidity risks and environmental and social challenges, including from climate events.

Supporting Kenya’s rating are fundamental credit strengths including a large, diversified economy that has shown resilience to shocks and benefits from a relatively developed capital and credit markets, enabling the government to issue long-term domestic debt in local currency.

Kenya’s local currency (LC) ceiling remains at B1, maintaining a three-notch difference with the sovereign rating, which reflects relatively weak institutions and policy predictability and moderate political risk set against a relatively small footprint of the government in the economy and limited external imbalances.

The foreign currency (FC) ceiling remains at B2, one-notch below the LC ceiling, which reflects relatively low external debt and an open capital account, which reduce, although do not remove entirely, the incentives or need to impose transfer and convertibility restrictions in scenarios of intensifying financial stress.

Moody’s noted that domestic borrowing costs have declined significantly since July 2024 amid monetary easing and strong investor appetite at bond auctions.

Given low inflation and a stable exchange rate, there is potential for further reductions in domestic borrowing costs as past monetary policy rate cuts pass through to lower long-term borrowing costs.

However, this prospect depends on the implementation of fiscal consolidation aimed at achieving small primary surpluses for the first time in more than a decade.

“In our central scenario, government interest payments as a percentage of GDP and revenue will start declining in the fiscal year ending June 30, 2026 (fiscal 2026), even though risks remain.

“Domestic funding represents about three-quarters of the government’s needs and is therefore key in driving liquidity risks and debt affordability.

“Since mid-2023, inflation has remained within the Central Bank of Kenya’s (CBK) 2.5% to 7.5% target range, nearing the lower end.

“Coupled with a stable exchange rate, this has allowed the CBK to ease monetary policy, reversing some of the tightening from earlier. This shift has improved domestic liquidity and reduced short-term interest rates.

“Since July 2024, the government’s borrowing costs have declined significantly due to lower risk premiums and monetary easing.

“The 91-day Treasury bill yield dropped from 16% in July to 10% by early January 2025. Longer-dated Treasury bond yields have also declined, though less sharply; yields for bonds maturing in more than five years fell from 16.5% six months ago to a range between 14% and 15% at recent auctions.

“Improved domestic financing conditions signal easing government liquidity risks and will gradually enhance debt affordability”.

However, Moody’s added that the immediate impact on debt affordability will be limited as the government has front-loaded its financing for fiscal 2025.

Moody’s said if the government’s revenue-led fiscal consolidation yields results, even if not entirely up to the targets set, the government will gain better access to concessional financing and market funding due to higher market confidence.

In turn, improved external funding access would allow the government to more easily meet its still large external amortizations or improve its debt maturity profile through debt buybacks without putting pressure on international reserves or the exchange rate.

Kenya’s external refinancing needs remain substantial, with gross external amortizations averaging between $2.5 billion and $3 billion annually over the next five years.

The government will have to repay an amortizing Eurobond $300 million per year between 2025 and 2027, before a $1 billion maturity in 2028. These obligations are in addition to large maturities due to bilateral and multilateral creditors.

Analysts noted that the central bank has built up international reserves ahead of these external maturities. At the end of 2024, international reserves stood at $9.2 billion, up from $6.6 billion at the end of 2023, and equivalent to 4.7 months of import coverage.

Moreover development funding will likely continue if the government continues to show commitment to revenue-led fiscal consolidation, though likely smaller than the extraordinary levels since 2020.

The Kenyan government will complete its final review of its current IMF programs in April 2025. A new IMF program would enhance external financing and policy effectiveness. Even without IMF funding, other multilateral creditors like the World Bank will remain significant sources of financing.

Additionally, Kenya will rely on commercial borrowing from international markets or bilateral creditors.

After a cabinet reshuffle in mid-2024, the government managed to get Parliament’s approval to amend several pieces of existing tax legislation to broaden and increase its tax base.

The passage of tax legislation underscores a proactive stance toward fiscal consolidation and commitment to enhancing revenue collection.

This revenue-led strategy has the potential to produce a more durable reduction in Kenya’s fiscal deficit as opposed to deficit reduction driven mainly by cuts to discretionary spending.

However, Kenya’s past track record of struggling to expand revenue generation and narrow fiscal deficits underscores the challenge that the government faces.

The tax measures, which went into effect at the end of December 2024, seek to raise about 1% of GDP through the elimination of tax loopholes and minimizing tax expenditures, as well as administrative gains.

The tax measures will buttress ongoing efforts to improve non-tax revenue collection and would offset about half of the forgone revenue from the rejected 2024 Finance Bill that sparked protests in June 2024.

“We expect the government to collect less than its full-year revenue target, as it has historically overestimated revenue collection”, Moody’s said in the rating note.

Analysts said if the government can increase revenue, in line with medium-term budget targets, this will create scope for a faster pace of fiscal consolidation than currently envisioned in its baseline.

“Under our baseline, we expect Kenya’s primary balance to turn to a surplus of 0.9% of GDP in fiscal 2025, compared with an average primary deficit of 2% of GDP over the past five years.

“Primary surpluses of this size would stabilize Kenya’s debt-to-GDP ratio at around 66% of GDP before placing the debt on a slight downward trend and represent a faster pace of fiscal consolidation compared to our forecast at the time of the downgrade to Caa1 in July 2024”, Moody’s said.

Analysts said the affirmation of Kenya’s Caa1 rating reflects elevated credit risks stemming from Kenya’s very weak debt affordability and large gross financing needs.

Notwithstanding the potential for lower borrowing costs to feed into a more positive debt trajectory, Kenya has struggled historically to stabilize its debt burden, let alone sustainably reduce its debt ratio.

Kenya’s fiscal policy effectiveness is constrained by relatively weak institutions, policy unpredictability and high levels of corruption. Moreover, Kenya’s still elevated financing needs continue to pose liquidity risks.

Kenya is exposed to significant environmental risks, such as climate events affecting the agriculture sector, and social risks, including high poverty levels and limited access to basic services.

The Caa1 rating also incorporates Kenya’s fundamental credit strengths, which include its large, diversified economy with demonstrated resilience to various shocks. Kenya’s economy is significantly larger than Caa-rated peers.

The rating note stated that Kenya’s economy has also grown more quickly while displaying lower volatility than similarly rated peers. The favourable growth performance supports a stable macroeconomic environment conducive to fiscal and economic reforms envisioned by the government, implementation challenges notwithstanding.

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