In a major development for Kenya’s economic outlook, Moody’s Investors Service has upgraded the country’s sovereign credit rating to “positive” from “negative,” citing an easing of liquidity risks and potential improvements in debt affordability. The announcement, made on January 25, 2025, comes seven months after the agency had downgraded Kenya’s rating, a move that had raised concerns about the nation’s fiscal health and borrowing capacity.

This revision signals growing confidence in Kenya’s financial and economic management, especially as the government continues to implement measures aimed at fiscal consolidation, improved revenue collection, and economic stability.

What Led to the Upgrade?

Moody’s cited several key factors behind the decision to revise Kenya’s credit outlook:

1. Easing Liquidity Risks:
   Kenya has shown progress in managing its liquidity position, with domestic financing costs starting to decline. The Central Bank of Kenya (CBK) has taken steps to stabilize inflationary pressures and enhance access to financing. Lower borrowing costs, coupled with improved access to concessional funding, have contributed to a more favorable liquidity environment.
2. Debt Affordability Improvements:
   The government’s efforts to manage social demand and reduce fiscal deficits have started to bear fruit. If sustained, these efforts could make Kenya’s debt burden more manageable, boosting investor confidence. Moody’s noted that the country’s revenue mobilization initiatives present an opportunity to further improve debt affordability.
3. Favorable Monetary Policy Shifts:
   A more accommodative monetary policy environment has helped reduce pressure on domestic financing. Kenya’s Central Bank has focused on ensuring price stability and increasing the availability of credit to key sectors, further supporting economic recovery.
4. Strengthened Revenue Collection:
   Kenya has implemented reforms to increase revenue collection, including expanded tax bases, digitalization of revenue processes, and enforcement measures targeting tax evasion. If these efforts continue, they could significantly enhance the country’s fiscal sustainability.

Challenges Still Persist

While the outlook has improved, Moody’s also emphasized that Kenya continues to face elevated credit risks. The nation’s weak debt affordability and high gross financing needs remain critical concerns.

Kenya’s gross public debt stands at approximately 65% of GDP as of 2024, a level considered high for a developing economy. Servicing this debt requires significant resources, with interest payments consuming a large share of government revenue.

In its Public Debt Management Strategy 2025, the National Treasury highlighted the challenges posed by the earlier credit downgrade, including higher borrowing costs, reduced investor confidence, and a depreciating currency. The revision to “positive” offers some relief, but sustained efforts are needed to ensure long-term debt sustainability.

Government Measures to Boost Fiscal Stability

To address these challenges, the Kenyan government has taken a series of steps aimed at reducing fiscal deficits and improving its debt profile:

1. Fiscal Consolidation:
   The government has introduced stricter budgetary controls to curb unnecessary spending and prioritize high-impact projects. This includes reallocating resources to sectors such as agriculture, healthcare, and infrastructure, which are critical for economic growth.
2. Tax Reforms:
   The Kenya Revenue Authority (KRA) has intensified efforts to enhance revenue collection. Key initiatives include the digitalization of tax systems, enforcement of compliance among businesses, and introduction of measures to broaden the tax base. These reforms aim to increase the country’s tax-to-GDP ratio, which currently lags behind regional peers.
3. Debt Restructuring:
   Kenya has sought to restructure its external debt portfolio, focusing on concessional loans with lower interest rates and longer repayment periods. This strategy reduces the reliance on expensive commercial borrowing, which has previously strained the country’s finances.
4. Boosting Domestic Production:
   The government has also emphasized policies to boost domestic manufacturing and exports, which could help reduce the country’s trade deficit and stabilize the Kenyan shilling. Key sectors such as agriculture, energy, and technology have been identified as drivers of economic diversification.

Regional and Global Implications

Kenya’s improved credit outlook has broader implications for the East African region. As one of the largest economies in the region, Kenya’s fiscal and economic policies often serve as a bellwether for neighboring countries. A stronger Kenyan economy could enhance regional trade and investment, particularly as the East African Community (EAC) moves toward deeper economic integration.

Globally, the revision underscores the growing investor confidence in emerging markets that demonstrate fiscal discipline and economic resilience. Kenya’s ability to secure concessional and commercial funding on better terms will likely improve, attracting both domestic and foreign investors.

Impact on Local and International Markets

Kenya’s credit upgrade is expected to have a positive impact on financial markets and the broader economy:

• Government Borrowing Costs: The improved outlook may lead to lower yields on government securities, reducing the cost of borrowing for the state.
• Investor Confidence: A “positive” rating signals to investors that Kenya is on a path toward economic recovery and stability, which could attract increased foreign direct investment (FDI).
• Currency Stability: A stronger credit outlook could bolster the Kenyan shilling, reducing inflationary pressures and supporting purchasing power for households and businesses.

Key Sectors to Watch

1. Infrastructure:
   With improved access to funding, Kenya is likely to prioritize infrastructure development, particularly in areas such as transport, energy, and telecommunications. Projects such as the Standard Gauge Railway (SGR) and renewable energy initiatives could benefit from increased investment.
2. Agriculture:
   As a key driver of the economy, agriculture is expected to receive continued support, with a focus on enhancing productivity and value addition. The government’s plans to promote agro-processing and export diversification are critical for boosting foreign exchange earnings.
3. Technology:
   Kenya’s growing technology sector, often referred to as the “Silicon Savannah,” is poised to attract more investment. The fintech industry, in particular, has been a standout performer, with companies like M-Pesa leading the way in mobile payments and digital financial services.

Outlook for 2025 and Beyond

Kenya’s revised credit rating sets a positive tone for 2025, but challenges remain. To maintain this momentum, the government must stay the course on fiscal consolidation, enhance revenue collection, and address structural inefficiencies in key sectors.

While the path to economic recovery may not be smooth, the Moody’s upgrade offers a glimmer of hope for Kenya as it seeks to navigate its fiscal challenges and unlock its economic potential.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

27^th January, 2025