Moody’s Ratings (Moody’s) on Friday, January 24 changed the Government of Kenya’s (Kenya) outlook to “positive” from “negative” and affirmed the local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings at Caa1.
The change in outlook to positive is driven by the increasing likelihood of Kenya’s liquidity risks easing and debt affordability improving over time.
Domestic financing costs have started to decline amid monetary easing and could continue to do so if the government sustains its more effective management of social demand and fiscal consolidation.
Such a track record would also boost Kenya’s access to both concessional and commercial external funding. Revenue collection efforts, if successful, present potential for further improvements in debt affordability, although Kenya has struggled to expand revenue significantly and durably in the past, notwithstanding recent measures.
The affirmation of Kenya’s Caa1 rating reflects still elevated credit risks driven by very weak debt affordability and high gross financing needs relative to funding options.
Fiscal policy effectiveness is limited by weak institutions, policy unpredictability, and high corruption levels, hindering revenue collection.
Additionally, Kenya also faces significant liquidity risks and environmental and social challenges, including from climate events.
Supporting Kenya’s rating are fundamental credit strengths including a large, diversified economy that has shown resilience to shocks and benefits from a relatively developed capital and credit markets, enabling the government to issue long-term domestic debt in local currency.
Kenya’s local currency (LC) ceiling remains at B1, maintaining a three-notch difference with the sovereign rating, which reflects relatively weak institutions and policy predictability and moderate political risk set against a relatively small footprint of the government in the economy and limited external imbalances. The foreign currency (FC) ceiling remains at B2, one-notch below the LC ceiling, which reflects relatively low external debt and an open capital account, which reduce, although do not remove entirely, the incentives or need to impose transfer and convertibility restrictions in scenarios of intensifying financial stress.
