Kenya’s financial and political landscape has been thrown into turmoil following the decision by President William Ruto to rescind a highly controversial finance bill. This decision has prompted global credit rating agencies to reassess the country’s economic outlook, leading to significant downgrades that could have lasting impacts on Kenya’s economy. The most recent downgrade by S&P Global Ratings, which lowered Kenya’s long-term sovereign credit rating from B to B-, underscores the growing concerns about the country’s fiscal and debt management policies.

Background: The Controversial Finance Bill and Protests

The 2024/2025 Finance Bill, proposed by President Ruto’s administration, sought to introduce several tax hikes aimed at increasing government revenue. However, the bill was met with widespread opposition, leading to massive protests across the country. The protests, which initially began as peaceful demonstrations led primarily by young people, soon turned violent, resulting in more than 60 deaths, according to reports from Kenyan human rights organizations.

The finance bill included tax measures that were seen as overly burdensome on the population, especially during a time when the country was grappling with high inflation, unemployment, and the economic aftershocks of the COVID-19 pandemic. Among the most contentious proposals was the introduction of new taxes on essential goods and services, which many Kenyans viewed as an additional strain on their already stretched finances.

Faced with growing unrest and a rapidly deteriorating political situation, President Ruto made the decision to withdraw the finance bill. This move, while temporarily calming the unrest, has had significant ramifications for Kenya’s economic standing on the global stage.

S&P’s Downgrade and Its Implications

On August 25, 2024, S&P Global Ratings announced that it had downgraded Kenya’s long-term sovereign credit rating from B to B-. In its statement, the rating agency cited the decision to abandon the proposed tax measures as a key factor in the downgrade. S&P expressed concerns that the government’s decision would exacerbate Kenya’s already precarious fiscal situation, leading to a deterioration in the country’s medium-term fiscal and debt outlook.

The downgrade reflects a broader concern about Kenya’s ability to manage its growing debt burden, which currently stands at approximately $78 billion. The cancellation of the finance bill has created a significant gap in the government’s budget, raising questions about how the country will meet its financial obligations without the anticipated revenue from the proposed taxes.

While S&P maintained a “stable” outlook for Kenya, it noted that the country’s large external imbalances remain a critical vulnerability. This means that while the agency does not anticipate further immediate downgrades, Kenya’s economic situation remains fragile, and any further shocks could lead to additional negative assessments.

Comparative Downgrades by Other Rating Agencies

The S&P downgrade follows similar actions by other leading credit rating agencies. Earlier in August 2024, Fitch Ratings also downgraded Kenya’s credit rating, citing similar concerns about the country’s fiscal policies and debt management. Fitch highlighted the risks associated with Kenya’s high debt levels and the challenges the government faces in securing sufficient revenue to meet its obligations.

In July 2024, Moody’s Investors Service also downgraded Kenya’s debt rating, pushing it further into “junk” territory. Moody’s downgrade was particularly concerning as it signaled that Kenya’s debt instruments were becoming increasingly risky for investors. The agency pointed to the growing fiscal deficits, high debt servicing costs, and the lack of a clear and sustainable plan to address these issues as key factors behind the downgrade.

The series of downgrades by these major rating agencies underscores the growing concern among international investors and financial institutions about Kenya’s economic trajectory. The downgrades are likely to make it more difficult and expensive for Kenya to borrow money on international markets, as investors will demand higher yields to compensate for the increased risk.

Political and Economic Repercussions

The economic repercussions of these downgrades are profound. Kenya, which has long been considered one of East Africa’s more stable and growing economies, now faces the challenge of restoring investor confidence. The downgrades will likely increase the cost of borrowing for the government, further exacerbating the debt burden and limiting the government’s ability to invest in critical infrastructure and social services.

Moreover, the political implications of the downgrades cannot be understated. The protests against the finance bill represent one of the most significant challenges to President Ruto’s presidency. While the withdrawal of the bill has brought some temporary relief, the underlying economic grievances that fueled the protests remain unresolved. Many young Kenyans, who were at the forefront of the protests, continue to express their dissatisfaction with the government’s policies online, calling for further action and even Ruto’s resignation.

In response to the downgrades and the ongoing political unrest, President Ruto has promised to implement government spending cuts and has sacked nearly his entire cabinet in an effort to signal a commitment to fiscal discipline. However, these measures have done little to quell the concerns of both domestic and international observers who are wary of the country’s economic direction.

Long-Term Economic Outlook

The long-term economic outlook for Kenya remains uncertain. The country’s heavy reliance on external borrowing has made it vulnerable to fluctuations in global financial markets. With the downgrades by S&P, Fitch, and Moody’s, Kenya may find it increasingly difficult to access affordable credit, which could limit its ability to finance key development projects.

The government’s plan to raise $1.2 billion by reinstating some of the unpopular taxes contained in the abandoned finance bill highlights the difficult balancing act that Kenya faces. On the one hand, the government needs to generate revenue to service its debt and fund essential services. On the other hand, any move to increase taxes risks reigniting public protests and further destabilizing the political environment.

In the coming months, the Kenyan government will need to navigate these challenges carefully. The implementation of fiscal reforms, efforts to attract foreign investment, and measures to improve economic transparency and governance will be crucial in restoring confidence in Kenya’s economy.

The Global Context and Kenya’s Position

Kenya’s economic struggles are not occurring in isolation. Across the African continent, many countries are facing similar challenges as they grapple with the impacts of high debt levels, inflation, and sluggish economic growth. The global economic environment, characterized by rising interest rates, volatile commodity prices, and geopolitical tensions, has added further pressure on developing economies like Kenya.

In this context, Kenya’s experience serves as a cautionary tale for other countries in the region. The downgrades by international rating agencies highlight the importance of sound fiscal management and the risks associated with over-reliance on external borrowing. For Kenya, the path forward will require a delicate balance between addressing immediate economic challenges and laying the groundwork for sustainable long-term growth.

Conclusion

The decision to rescind the 2024/2025 Finance Bill has had far-reaching consequences for Kenya, both politically and economically. The downgrades by S&P, Fitch, and Moody’s have underscored the challenges the country faces in managing its debt and restoring investor confidence. As Kenya navigates this difficult period, the government will need to implement bold and effective measures to address its fiscal imbalances, reduce its debt burden, and create an environment conducive to economic growth.

The road ahead will not be easy, but with careful planning and strategic decision-making, Kenya can overcome its current challenges and emerge stronger. The international community, including investors, development partners, and multilateral institutions, will be watching closely to see how Kenya addresses these issues and what steps it takes to ensure a stable and prosperous future for its people.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

26th August, 2024