Kenya’s rating cut deeper into junk by Moody’s, nears Nigeria’s

Moody’s Investors Service, a global credit rating agency, has downgraded Kenya’s ratings further into the junk territory as domestic financing conditions have worsened.

It lowered the country’s 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 the latest rating action, annouced on Friday, Kenya’s ratings were B2 and the outlook was negative. It is now one notch above Nigeria, whose ratings were lowered to Caa1 in January. 

“The rating downgrade is driven by an increase in government liquidity risks,” Moody’s said in a statement. “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.”

It said while demand for domestic debt issuance would likely improve, it would 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 rating agency said.

It said the review would 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. 

It 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 added.

The agency 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 country ceiling was lowered to B1 from Ba3, one notch below the LC ceiling. This “reflects relatively low external debt and a moderately 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,” Moody’s said.

It said government financing conditions in the domestic market have deteriorated significantly since early March 2023, with weaker demand for government securities resulting in shortfalls in net domestic financing. 

“Demand for Treasury bills has shifted toward the shortest-maturity Treasury bills, the 91-day bill.,” the agency said. “Demand for longer-dated bonds has also weakened, with very low demand at recent auctions, included a planned re-opening of a 15-year government bond which was canceled in April.”