New York, May 12, 2023 — Moody’s Investors Service (Moody’s) has today downgraded the Government of Kenya’s (Kenya) long-term foreign-currency and local-currency issuer ratings and senior unsecured debt ratings to B3 and placed the ratings on review for downgrade.
Prior to this rating action, Kenya’s ratings were B2 and the outlook was negative.
The rating downgrade is driven by an increase in government liquidity risks.
Domestic funding conditions have deteriorated considerably over the past two months, with very low net domestic issuance contributing to financing shortfalls and delays in government spending.
While demand for domestic debt issuance will likely improve, it will remain sensitive to government economic policies, particularly related to fiscal consolidation, and external financing conditions, signaling overall government liquidity risk has increased.
The initiation of the review for downgrade is prompted by the risk that the deterioration in Kenya’s domestic financing conditions persists amid still constrained external financing options.
The review will focus on domestic funding conditions and the government’s ability to rely on domestic debt to meet the majority of its net financing needs, preserving external funding options to meet large external debt refinancing needs.
The review will also focus on the cost of domestic borrowing and the extent to which net domestic financing improves at the expense of a worsening in debt affordability.
Moody’s has also lowered Kenya’s local currency (LC) country ceiling to Ba3 from Ba2, 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) country ceiling was lowered to B1 from Ba3, one notch below the LC ceiling, which reflects relatively low external debt and a moderately open capital account, which reduces, although does not remove entirely, the incentives or need to impose transfer and convertibility restrictions in scenarios of intensifying financial stress.
