Fitch Downgrades Kenya’s Credit Rating, Risks Market Sell-Off
Fitch Ratings has further downgraded Kenya’s credit rating, moving it deeper into junk status. This follows a similar action by Moody’s, signaling growing concerns over Kenya’s fiscal stability and potentially leading to a broader market sell-off.
On Saturday, Fitch reduced Kenya’s rating to “B- with a stable outlook.” This downgrade follows Moody’s decision on July 8, which had rated Kenya’s sovereign debt at ‘B’ since December 2022. Both rating agencies’ actions reflect increasing apprehension about Kenya’s ability to manage its debt effectively.
The downgrade is partly attributed to recent anti-government protests, which led President William Ruto to abandon proposed tax hikes in June. These tax increases were intended to generate an additional Sh346 billion in government revenue. The protests and the subsequent policy reversal have intensified concerns about Kenya’s fiscal management.
Credit ratings categorize debt quality, with higher ratings like ‘A’ indicating investment-grade debt, while ratings around ‘B’ suggest higher risk. Debt approaching a ‘C’ rating is considered junk, indicating a higher risk of default.
Fitch’s statement explained that the downgrade reflects increased risks to Kenya’s public finances. The government’s withdrawal from revenue measures in the 2024 Finance Bill, combined with political instability and rising domestic debt costs, contributed to the decision. Additionally, Fitch noted a higher risk to external financing, citing elevated borrowing costs and foreign exchange reserves below the median for ‘B’ rated countries.
One major concern is how Kenya will secure the $2-3 billion needed annually for financing. The failure of the Finance Bill has left the government without new tax revenue, and the current global interest rates may make the Eurobond market an impractical option for borrowing.
Fitch and Moody’s are two of the three major credit rating agencies that evaluate issuers’ creditworthiness. The third agency, S&P, is expected to announce its decision on Kenya’s rating on August 23.
The second downgrade by Fitch could provoke a more significant market reaction. Asset managers often have investment mandates that require bonds to be rated by at least two of the three major agencies. With Kenya’s credit downgraded by two agencies, there may be forced sales of Kenyan bonds by these funds, which could lead to higher bond yields and increased consumer borrowing costs.
Kenneth Minjire, a senior associate at broker AIB-AXYS Africa, noted that another downgrade would increase Kenya’s perceived risk to investors, potentially affecting demand for Kenyan bonds, equities, and the national currency.
