Fitch downgraded Kenya’s credit rating further into junk territory on Saturday, becoming the second major rating agency to take a dim view of the country’s debt, in a sign of Kenya’s darkening fiscal outlook and a move that risks a broader market sell-off.
Fitch cut Kenya’s credit rating to “B- with a stable outlook”, following a similar downgrade by Moody’s on July 8, which had rated the sovereign’s default risk at ‘B’ since December 2022.
Companies have become increasingly gloomy about Kenya’s ability to pay its debts, largely as a result of anti-government protests that forced President William Ruto to scrap proposed tax increases in June that would have raised Sh346 billion in additional government revenue.
In terms of ratings, high-quality or investment-grade debt is typically in the A range, with more speculative credits rated around B, and riskier bonds with a higher risk of default, known as junk, as they approach a ‘C’ rating or lower.
“The downgrade reflects heightened risks to Kenya’s public finances after the government backtracked on revenue measures in the 2024 Finance Bill in response to violent social protests, the increased risk to political stability, and rising domestic debt costs even as the authorities embark on spending cuts,” Fitch said in a statement. “Fitch also sees a moderately greater risk to external financing, partly reflecting elevated external commercial borrowing costs in the context of foreign exchange reserves below the ‘B’ median.”
At the heart of concerns about Kenya’s fiscal position is how the government will find the $2-3 billion in annual financing. The failure of the Finance Bill has deprived the government of new sources of tax revenue, and the Eurobond market may not be a viable option for borrowing due to elevated global interest rates.
Fitch and Moody’s are two of the three influential Wall Street agencies that rate the creditworthiness of issuers. The third, S&P, is due to announce its own decision on Kenya on August 23.
While the Moody’s downgrade rattled traders, it is this second downgrade of Kenya’s government bonds that could trigger a broader market sell-off. Asset managers allocate funds for clients under mandates that dictate the quality of investments. Typically, bonds held in delegated funds must be rated by at least two of the three agencies that rate issuers as having adequate creditworthiness.
With Kenya’s credit now downgraded by two major rating agencies, funds may be forced to sell down their Kenyan portfolios, pushing up bond yields and risking an increase in consumer borrowing costs.
Ahead of Fitch’s decision, Kenneth Minjire, senior associate for debt and equity at broker AIB-AXYS Africa, told the Business Daily that a second downgrade would make the country riskier in the eyes of investors, affecting demand for bonds, equities and the shilling.
