File image of President William Ruto
Moody’s Ratings has downgraded Kenya’s ability to access external credit, citing the government’s inability to manage its ballooning debt.
In a statement on Monday, July 8, Moody’s said the downgrade of Kenya’s rating reflects significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend.
The agency noted that the Kenyan government’s decision not to pursue planned tax increases and instead rely on expenditure cuts to reduce the fiscal deficit represents a significant policy shift with material implications for Kenya’s fiscal trajectory and financing needs.
“In the context of heightened social tensions, we do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future. As a result, we now expect the fiscal deficit to narrow more slowly, with Kenya’s debt affordability remaining weaker for longer. In turn, larger financing needs stemming from a wider deficit increase liquidity risk against more uncertain external funding options,” Moody’s stated.
Kenya’s local currency (LC) ceiling was lowered to B1 from Ba3, maintaining a three-notch difference with the sovereign rating, which reflects relatively weak institutions and policy predictability.
The foreign currency (FC) ceiling was lowered to B2 from B1, one notch below the LC ceiling, which reflects relatively low external debt and a moderately open capital account, which reduces, although does not remove entirely, the incentives or need to impose transfer and convertibility restrictions in scenarios of intensifying financial stress.
President William Ruto’s decision to drop the Finance Bill was also expected to complicate existing International Monetary Fund (IMF) programs.
According to Moody’s, there could be a delay in IMF disbursements.
President Ruto on 25 June announced the withdrawal of the controversial Finance Bill 2024, which proposed the introduction of a raft of tax measures.
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