Kenya suffered a significant financial blow, losing Sh19.5 billion, after Moody's downgraded its credit rating to junk status in 2024. The downgrade was a response to the Gen Z-led anti-budget protests that led to the withdrawal of the Finance Bill 2024. The Africa Peer Review Mechanism (APRM), an arm of the African Union, disputed the downgrade, citing a lack of information and context. The downgrade triggered a fall in the Kenyan shilling against the US dollar, making it costly for the country to borrow in foreign markets.
The APRM revealed that the losses from costly borrowing and a higher shilling cost the country $150 million (Sh19.5 billion). The pan-African organization cited the Kenyan case as one of the occasions that informed the launch of the continent's first credit rating agency, the Africa Credit Rating Agency (AfCRA). The agency aims to provide an alternative to the "big three" global ratings agencies, offering investors more information and context to assess the continent's investment risk better.
African leaders have long accused Western ratings agencies, including S&P, Moody's, and Fitch, of failing to fairly assess the risk of lending to African countries. They argue that these agencies move too quickly to downgrade them during crises such as conflicts and pandemics. In Kenya, Moody's downgraded the country's sovereign rating, citing its inability to implement austerity measures due to the withdrawal of the Finance Bill 2024.
Following the downgrade, the shilling depreciated from Sh124 to the dollar to Sh128, while Eurobond yields spiked from 7.2 percent to 9.1 percent. The APRM disputed the rating, calling it unfair and driven by euphoria rather than fundamentals. Dr. Misheck Mutize, lead expert on credit ratings at APRM, stated that the estimated cost of the rating was $150 million.
President William Ruto was forced to shelve the Finance Bill 2024 on June 26, 2024, following violent riots against the revenue-raising draft law. The government instead opted to cut its tax collection target for the fiscal year ending June 2025 by Sh177 billion, even as it announced several budget cuts. Moody's poured cold water on Kenya's ability to pursue fiscal consolidation and austerity measures by cutting expenditure.
The policy note from APRM reckons that the commentary by Moody's eroded investor confidence, triggered an artificial market panic, and significantly increased Kenya's external financing costs. This derailed Nairobi's Eurobond buyback plan, and the experts at APRM link the Moody's commentary to the Treasury being forced to increase its domestic borrowing and delayed fiscal consolidation.
The African Union's drive to improve borrowing terms for the continent has become more urgent following years of increased government borrowing, pushing some countries into debt distress. The Africa Credit Rating Agency (AfCRA) is expected to boost coverage, with 23 economies on the continent lacking a rating from the three big agencies. The success of the initiative will hinge on the perceived credibility of the new agency, especially in times of crisis.
Key points
- The Africa Credit Rating Agency (AfCRA) aims to provide an alternative to the "big three" global ratings agencies.
- Kenya lost Sh19.5 billion after Moody's downgraded its credit rating to junk status in 2024.
- The downgrade triggered a fall in the Kenyan shilling against the US dollar, making it costly for the country to borrow in foreign markets.
