Kenya's fiscal and economic landscape has received a boost after Moody's Ratings revised the country's outlook to positive from negative while maintaining its Caa1 rating for long-term local and foreign currency issuer and debt.

This development underscores the increasing likelihood of Kenya mitigating its liquidity risks and improving debt affordability.

According to Moody’s, "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 agency attributed the progress to declining domestic financing costs amid monetary easing and the government's commitment to fiscal consolidation.

Domestic borrowing costs have witnessed a sharp decline since mid-2024.

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The 91-day Treasury bill yield, for instance, fell from 16 per cent in July 2024 to 10 per cent by early January 2025.

This drop aligns with reduced risk premiums, stable inflation rates within the Central Bank of Kenya’s (CBK) target range of 2.5–7.5 per cent, and a stable exchange rate.

Moody's noted that these factors, if sustained, could further reduce borrowing costs and enhance debt affordability, particularly as Kenya continues its efforts to achieve primary surpluses.

The rating agency also highlighted Kenya's potential for greater access to concessional and commercial external funding if revenue-led fiscal reforms yield results.

Kenya's external financing needs, averaging between $2.5 billion and $3 billion annually over the next five years, include amortizations of $300 million annually from 2025 to 2027 for an amortizing eurobond and a $1 billion maturity in 2028.

At the close of 2024, Kenya’s international reserves had grown to $9.2 billion, equivalent to 4.7 months of import cover, reflecting increased resilience.

Moody’s affirmed, “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.”

Kenya's challenges include policy unpredictability, high levels of corruption, and exposure to climate and social risks such as poverty and unemployment.

However, Moody’s acknowledged the country's fundamental credit strengths, citing its large and diversified economy, robust capital markets, and resilience to shocks.

Recent fiscal reforms, including tax amendments passed in late 2024, aim to broaden Kenya’s tax base and eliminate loopholes.

These measures, designed to raise about 1 per cent of GDP, have been described as critical for reducing the fiscal deficit sustainably.

Nevertheless, Moody’s cautioned that Kenya’s historical struggles with revenue collection may temper the anticipated gains.

The rating agency further observed that improved fiscal policy effectiveness could stabilise Kenya's debt-to-GDP ratio at approximately 66 per cent by 2026.

Kenya’s economic resilience, evidenced by a real GDP growth rate of 5.6 per cent in 2023, positions it favourably compared to similarly rated peers.

Despite these improvements, Kenya remains vulnerable to environmental, social, and governance risks.

Moody’s assigned an ESG Credit Impact Score of CIS-4, reflecting the country’s exposure to climate events, governance weaknesses, and social challenges.

The agency concluded by indicating that further improvements in liquidity, revenue collection, and debt management could lead to a rating upgrade.

Conversely, a reversal of fiscal reforms or mounting external pressures could threaten Kenya’s progress.