Treasury warns of the impact of credit rating downgrade

Recent downgrades of Kenya’s credit rating have placed the National Treasury in a precarious position, complicating its ability to borrow commercially and intensifying the country’s fiscal challenges.

Standard & Poor’s (S&P) decision in August 2024 to downgrade Kenya’s long-term sovereign credit rating from B to B- cited weakened fiscal consolidation and rising public debt, sending shockwaves through the economy.

The downgrade reflected global concerns about the country’s debt trajectory, highlighting risks that could have far-reaching consequences for its financial health and development agenda.

According to the National Treasury, the downgrade has significantly raised borrowing costs, a critical challenge for a country that has historically relied on external borrowing to finance its budget deficits.

A lower credit rating increases the interest rates Kenya must pay on international loans, making it more expensive to access crucial funds. The Treasury noted that these higher costs are already limiting Kenya’s access to credit markets, which has repercussions for government spending on essential services and development projects.

“Rating downgrades lead to increased borrowing costs, limiting access to credit markets, low investor confidence, currency depreciation, and debt sustainability risk,” the Treasury said in its 2025 Public Debt Management Strategy released in Nairobi, Kenya’s capital.

National Treasury said that Kenya’s public debt remains sustainable but with a high risk of debt distress, as the nation’s present value of public debt was 63 per cent of the gross domestic product (GDP), against the benchmark debt threshold of 55 percent of debt to GDP.

Investor confidence in Kenya’s economy has also taken a hit, further compounding the issue. International investors tend to shy away from countries with poor credit ratings due to perceived risks, which can lead to reduced foreign direct investment (FDI).

For Kenya, which depends on FDI to stimulate economic growth, this is a major setback. Businesses looking to expand or start operations in Kenya may delay their plans, awaiting more favourable conditions.

The Treasury has expressed concern that currency depreciation could lead to inflationary pressures, raising the cost of living for ordinary Kenyans and increasing economic inequality.

Kenya’s public debt-to-GDP ratio has reached 63 per cent, surpassing the 55 per cent threshold considered sustainable for developing economies. This elevated debt level places Kenya at high risk of debt distress, with the Treasury warning that it has limited room for further borrowing without exacerbating the situation.

Treasury’s response to the downgrades includes a shift in its borrowing strategy, with plans to source 25 per cent of its gross borrowing externally and 75 per cent domestically.