Fitch’s Latest Downgrade Poses Risks for Kenyan Financial Markets
On Saturday, Fitch Ratings downgraded Kenya’s credit rating further into junk status, marking the second major rating agency to express concern over the country’s debt. This downgrade adds to Kenya’s growing fiscal challenges and could lead to a broader market sell-off.
Fitch lowered Kenya’s credit rating to “B- with a stable outlook,” following a similar move by Moody’s on July 8, which had rated Kenya’s sovereign debt as ‘B’ since December 2022. The downgrades reflect increasing pessimism about Kenya’s financial stability and its ability to manage debt.
The downgrade comes amid heightened concerns about Kenya’s economic health, primarily driven by the government’s recent reversal on tax increases. President William Ruto was forced to abandon proposed tax hikes in June, which were expected to raise Sh346 billion in additional revenue, due to widespread anti-government protests.
Credit ratings typically categorize high-quality or investment-grade debt as being in the A range. More speculative credits are rated around B, while riskier bonds that are closer to default are rated as junk or approaching a ‘C’ rating.
Fitch’s statement highlighted increased risks to Kenya’s public finances, citing the government’s retreat from planned revenue measures as a key factor. The agency also noted rising domestic debt costs and heightened external financing risks due to lower foreign exchange reserves compared to the ‘B’ median.
A central issue for Kenya’s fiscal stability is securing $2-3 billion in annual financing. The failure to pass the Finance Bill has removed potential new tax revenue sources, and borrowing through the Eurobond market may be hindered by high global interest rates.
Fitch and Moody’s are two of the three major rating agencies that assess creditworthiness, with the third being S&P. S&P is expected to announce its decision on Kenya’s rating on August 23.
While the initial downgrade by Moody’s caused market unease, Fitch’s recent downgrade could potentially lead to a broader sell-off. Asset managers often have investment mandates requiring bonds to be rated by at least two of the three major agencies as having adequate creditworthiness.
With Kenya now downgraded by two major agencies, there is a risk that investment funds may be compelled to divest from Kenyan assets. This could result in higher bond yields and increased borrowing costs for consumers.
Kenneth Minjire, senior associate for debt and equity at AIB-AXYS Africa, warned that a second downgrade would make Kenya appear riskier to investors, potentially affecting demand for Kenyan bonds, equities, and the shilling.
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