Kenya’s credit rating has been downgraded to Caa1 by Moody’s Investors Service, a deeper descent into junk status for the East African nation.
The downgrade comes in the wake of deadly protests that forced the Kenyan government to abandon plans for new tax hikes aimed at raising over $2 billion.
Moody’s cited significantly reduced capacity for revenue-based fiscal consolidation as the primary reason for the downgrade.
The credit assessor’s latest report reflects a pessimistic view of Kenya’s ability to improve debt affordability and place its debt on a sustainable downward trajectory.
“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,” Moody’s said in a statement.
The decision by President William Ruto to withdraw the tax hike plan followed widespread anti-government demonstrations.
The protests, which resulted in the deaths of at least 41 people, were triggered by rising food prices and a youth unemployment rate that the Federation of Kenya Employers estimates to be as high as 67%.
The proposed tax increases were initially intended to bolster state finances and secure additional funding from the International Monetary Fund (IMF). However, the social backlash forced the government to reconsider its approach.
Instead of raising taxes, Kenya’s National Treasury has announced plans to slash expenditure by 177 billion shillings and increase borrowing to cover the shortfall.
“The government had planned to introduce new taxes to help raise an additional 346 billion shillings ($2.7 billion) in the fiscal year that began on July 1. Instead, the Treasury will reduce expenditure by 177 billion shillings and borrow the balance,” the National Treasury stated.
Moody’s maintained a negative outlook on Kenya’s debt, highlighting ongoing risks related to government liquidity.
The credit rating agency also expressed concerns about the country’s fiscal deficit, which is now expected to narrow at a slower pace than previously anticipated due to the reliance on spending cuts rather than revenue generation.
“As a result, we now expect the fiscal deficit to narrow more slowly, with Kenya’s debt affordability remaining weaker for longer,” Moody’s said.
The downgrade is a significant blow to Kenya, which has been struggling to balance fiscal reforms with social stability.
The country’s economic challenges are compounded by declining output from aging oil fields and frequent disruptions in gas transportation due to pipeline vandalism.
In response to the downgrade, Kenya’s government reiterated its commitment to addressing the fiscal challenges.
Ekperipe Ekpo, the Minister of State for Petroleum Resources, said there is an ongoing effort to resolve the crisis in gas feedstock supplies and enhance the nation’s energy security.
“I am impressed with what I have seen here today. We are moving towards zero emission and we need to do everything to supply gas to Nigerians,” Ekpo stated.
