Fitch Ratings, a prominent global rating agency, has downgraded Kenya’s long-term foreign-currency issuer default rating (IDR), though the outlook remains stable.
Credit ratings assess the ability of entities like governments to meet their debt obligations based on an independent evaluation of their financial stability.
On August 2, Fitch attributed Kenya’s downgrade to fiscal uncertainties following President William Ruto’s withdrawal of a tax-increasing bill in response to public protests. The rating was lowered from ‘B’ to ‘B-’, indicating a status six levels below investment grade.
Fitch explained that the downgrade was influenced by increased risks to Kenya’s public finances, the government’s reversal on the Finance Bill 2024 revenue measures due to civil unrest, and growing domestic debt costs, despite ongoing expenditure reductions.
The agency also noted a heightened risk to external financing, partly due to high external commercial borrowing costs and foreign-exchange reserves falling below the ‘B’ median level.
Factors contributing to the downgrade include elevated socio-political risks, a widening fiscal deficit, fiscal slippage, rising interest payments, and high debt levels.
Fitch anticipated that revenue would fall short of its target for FY26, at 17.4% of GDP, compared to the ‘B’ median projection of 18.1%. They expect a modest reduction in the deficit to 4.3% of GDP. Fiscal pressures have intensified following a FY24 budget deficit of 5.6% of GDP, exceeding initial projections due to increased spending and lower tax revenues.
Revenue shortfalls have led to more expensive borrowing from external and domestic sources, with rising yields on short-term government securities reflecting higher central bank rates and liquidity issues.
Government interest payments as a percentage of revenue are projected to increase to 31.7% in 2025 and 32.8% in 2026, significantly higher than the 2026 median for ‘B’ rated peers, which stands at 12%. Government debt-to-GDP climbed to nearly 72% in FY23, up from 67% in FY22, partly due to currency depreciation. This ratio is expected to decline slightly to 65.6% by the end of FY26, influenced by nominal GDP growth, though it remains above the projected 2025 median of 51.5% for ‘B’ category peers.
The recent nationwide protests in Kenya were sparked by a controversial finance bill introduced by President Ruto, which was initially part of the budget for the coming year. Despite the bill’s aim to boost the economy and increase revenue by 346.7 billion Kenyan shillings, several proposed taxes, including VAT on bread and taxes on foreign exchange transactions, were withdrawn in response to public outcry.
