On Friday, Fitch Ratings delivered a sobering assessment of Kenya’s financial stability by downgrading the East African nation’s sovereign credit rating from “B” to “B-“. This move reflects mounting concerns over Kenya’s public finances, exacerbated by recent political and economic turmoil.
The downgrade comes in the wake of a significant policy reversal by the Kenyan government. Initially, the government had introduced an ambitious tax reform plan aimed at raising an additional $2.7 billion for the fiscal year 2024/25. This plan, recommended by the International Monetary Fund (IMF), was designed to address Kenya’s fiscal imbalances and stabilize the country’s economic situation. However, widespread public protests against the proposed tax hikes forced the government to withdraw the plan in June, creating a substantial gap in anticipated revenue.
Fitch Ratings highlighted that this retraction, driven by social unrest, significantly undermines the government’s efforts to consolidate its fiscal position. The agency noted that the risk of prolonged unrest complicates Kenya’s ability to implement effective fiscal consolidation strategies. This disruption in revenue collection further strains the government’s capacity to manage its budget and maintain economic stability.
In addition to the domestic political challenges, Kenya faces difficulties in securing external financing. Fitch pointed out that the country’s high borrowing costs and low foreign-exchange reserves add another layer of complexity to its financial situation. The high cost of borrowing reflects investor concerns about Kenya’s economic outlook, while the dwindling reserves limit the government’s ability to manage external debt and support its currency.
The credit rating downgrade by Fitch follows a similar action by Moody’s, which downgraded Kenya’s credit rating further into junk status just last month. Moody’s move underscored the deteriorating confidence in Kenya’s economic management. S&P Global Ratings, another key credit ratings agency, is expected to review Kenya’s rating by August 23, and its decision could further impact Kenya’s financial standing.
Despite the downgrade, Fitch maintained a “stable” outlook for Kenya. This stable outlook is largely attributed to the strong support Kenya receives from official creditors, including the IMF and the World Bank. These international institutions provide crucial financial assistance and support, which helps Kenya navigate its near-term external liquidity pressures and manage its substantial debt repayment obligations.
In response to the backlash over the tax reforms, the Kenyan government has proposed a revised budget. This new budget includes plans to cut spending and expand the fiscal deficit, aiming to balance the immediate need for financial stability with the broader goal of economic recovery. These measures reflect the government’s attempt to address the economic challenges while accommodating the public’s concerns.
Overall, Fitch’s downgrade underscores the severe financial and political challenges Kenya faces. The country’s economic stability hinges on its ability to secure continued international support and effectively manage its fiscal policies amid ongoing social and political pressures. The coming months will be critical in determining whether Kenya can stabilize its economy and restore investor confidence.