Moody’s gives Kenya “positive” economic outlook as Ruto supports

Global ratings agency Moody’s has revised Kenya’s outlook to “positive” from “negative” citing a potential ease in liquidity risks and improving debt affordability over time despite mounting public outcry over high levels of impoverishment, economic hardships and high cost of living.
Moody’s ratings is based on a potential reduction in liquidity risks and improved debt affordability over time in a report released on Friday, January 24, 2025.
Kenya has been struggling with heavy debt and looking for new financing lines since last year due to nationwide protests dubbed Gen Zs uprising against proposed tax increases, poor governance and corruption.
In response,President Ruto expressed confidence in the future of Kenya’s economy, saying the January 2025 upgrade by Moody’s Ratings from negative to positive is a sign of great things to come.
Speaking on Sunday at a church service in Nairobi today, the Head of State said the improved credit rating was a testament to the strengthening of Kenya’s economy, attributed to measures implemented by his administration to reverse a downward economic trend.
“Yesterday, we got good news on what God is doing in healing our economy that Kenya is going to go places and I want to thank God that together we have seen inflation numbers, exchange rates, and interest rates come down,” President Ruto said.
The rating agency has also revealed that low inflation and a stable exchange rate enjoyed currently could lead to a decline in domestic borrowing costs as the effects of past monetary policy rate cuts continue to lower long-term borrowing rates.
“The change in outlook to positive is driven by the increasing likelihood of Kenya’s liquidity risks easing and debt affordability improving over time,” the report for January 2025 says.
According to Moody, the domestic financing costs have started to decline amid monetary easing and could continue if the government sustains its effective management of social demand and fiscal consolidation.
It further reveals that a new International Monetary Fund (IMF) program would bolster Kenya’s external financing, with multilateral lenders like the World Bank remaining key funding sources even without IMF support.
However, Moody’s affirmed that Kenya’s local and foreign-currency long-term issuer ratings at “Caa1.” The Caa1 rating is an indication of poor quality and very high credit risk.
Meanwhile, Standard & Poor’s maintains Kenya’s credit rating at B- with a stable outlook. In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of a country, thus having a big impact on its borrowing costs.
In July 2024, Moody’s downgraded Kenya’s credit rating from B3 to Caa1, citing concerns about the government’s liquidity. However, in January 2025, Moody’s upgraded Kenya’s outlook to positive while affirming its Caa1 rating.
Such ratings would likely boost Kenya’s access to both concessional and commercial external funding. Moody’s also discloses that the revenue collection efforts, if successful, present potential for further improvements in debt affordability, although Kenya has struggled to expand revenue significantly and durably in the past, notwithstanding recent measures.
The affirmation of Kenya’s Caa1 rating reflects still elevated credit risks driven by very weak debt affordability and high gross financing needs relative to funding options. Fiscal policy effectiveness is limited by weak institutions, policy unpredictability, and high corruption levels, hindering revenue collection.
Additionally, Kenya also faces significant liquidity risks and environmental and social challenges, including from climate events.
Supporting Kenya’s rating is fundamental credit strengths including a large, diversified economy that has shown resilience to shocks and benefits from a relatively developed capital and credit markets, enabling the government to issue long-term domestic debt in local currency.
Kenya’s local currency (LC) ceiling remains at B1, 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) ceiling remains at B2, one-notch below the LC ceiling, which reflects relatively low external debt and an 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.
Domestic borrowing costs have declined significantly since July 2024 amid monetary easing and strong investor appetite at bond auctions.
Given low inflation and a stable exchange rate, there is potential for further reductions in domestic borrowing costs as past monetary policy rate cuts pass through to lower long-term borrowing costs. However, this prospect depends on the implementation of fiscal consolidation aimed at achieving small primary surpluses for the first time in more than a decade.
In our central scenario, government interest payments as a percentage of GDP and revenue will start declining in the fiscal year ending June 30, 2026 (fiscal 2026), even though risks remain.
Domestic funding represents about three-quarters of the government’s needs and is therefore key in driving liquidity risks and debt affordability
Since mid-2023, inflation has remained within the Central Bank of Kenya’s (CBK) 2.5 per cent to 7.5 per cent target range, nearing the lower end. Coupled with a stable exchange rate, this has allowed the CBK to ease monetary policy, reversing some of the tightening from earlier. This shift has improved domestic liquidity and reduced short-term interest rates.