Kenya lost Sh19.5 billion after Moody’s downgraded its credit to junk status in response to the Gen Z-led anti-budget protests in 2024, an arm of the African Union has revealed.
The Africa Peer Review Mechanism (APRM), a body under the African Union, disputed the downgrade, calling it unfair due to a lack of information and context.
The downgrade triggered a fall in the Kenyan shilling against the US dollar, and made it costly for the country to borrow in the foreign markets as financiers factored in the heightened credit risk.
The AU reckons that the losses from the costly borrowing and higher shilling cost the country $150 million (Sh19.5 billion).
The pan-African organisation cited the Kenyan case as one of the occasions that informed the launch of the continent’s first credit rating agency on Wednesday, seeking to provide an alternative to the “big three” global ratings agencies as debt burdens weigh on many African economies.
It reckons that the Africa Credit Rating Agency (AfCRA) — the creation of which African leaders endorsed in 2018 — will help investors to assess the continent’s investment risk better by offering investors more information and context
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 and of moving 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 withdrawal of the unpopular Finance Bill 2024.
It affirmed its ‘negative’ outlook for Kenya, stating that the larger fiscal deficits would push up borrowing requirements and subsequently increase government liquidity risks, triggering the AU protests.
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.
“We have done some very objective analysis on specific ratings that were being issued; for example, in Kenya in 2024, we disputed a rating that was issued by Moody’s, around June, within the euphoria of the Gen Z protest and the finance bill,” said Dr Misheck Mutize, lead expert on credit ratings at APRM in an interview with Business Daily.
“We thought that the rating was driven by euphoria rather than fundamentals. We did a policy note on the rating split on Kenya because there was a disparity in rating observations between two agencies, S&P and Moody’s. The estimated cost of that rating, which was accompanied by negative analyst commentary, was $150 million,” he added.
President William Ruto was forced to shelve the Finance Bill 2024 on June, 26, 2024, following violent riots against the revenue-raising draft law, which sought to introduce taxes on cars, money transfers and bread.
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. “The downgrade of Kenya’s rating reflects significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend,” said Moody’s in a credit rating assessment that came less than two weeks after the withdrawal of the Finance Bill.
Moody’s poured cold water on Kenya’s ability to pursue fiscal consolidation and austerity measures by cutting expenditure, noting that a big chunk of the spending items, which includes largely debt payments, are not discretionary and had to be paid.
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, derailing Nairobi’s Eurobond buyback plan.
APRM notes the sudden rise in yields and investor caution undermined the feasibility of a planned buyback as Kenya faced a steep premium.
The experts at APRM link the Moody’s commentary to the Treasury being forced to increase its domestic borrowing and delayed fiscal consolidation.
“On 24 January 2025, Moody’s revised Kenya’s outlook from “negative” to “positive,” skipping the intermediate “stable” outlook while affirming its Caa1 rating,” reads the policy note.
“The revision implicitly acknowledged that the earlier downgrade and negative outlook had been mistaken. However, the government had already incurred high financial costs,” it adds.
Kenya has been vocal in the continent’s push to have a more objective assessment of African nations, which culminated in the formation of AfCRA.
Other recently contested assessments include the downgrade of Botswana last month by Moody’s on grounds of a slump in diamond prices – the country’s key resource.
African Export-Import Bank (Afreximbank), a pan-African financial institution, last year severed ties with Fitch Ratings after it was downgraded to one level above junk status.
S&P, Moody’s and Fitch have previously rejected that criticism, saying they apply the same methodologies globally.
AfCRA, which will rate sovereign borrowers, financial institutions and private companies, will operate independently and be funded through shareholder capital and its operations, the AU said.
The AU says the agency should help improve African countries’ access to capital markets and provide investors with more balanced and context-specific assessments of economies across the continent.
It noted that African economies are currently rated B to B-minus on average, compared with BB for other emerging regions, a gap the AU says can limit some investors’ participation and raise borrowing costs.
The drive to improve borrowing terms for the continent has become more urgent following years of increased government borrowing, pushing some countries into debt distress in recent years.
In many countries, interest payments have exceeded the annual budgets for key socialsectors such as health and education.
AfCRA is also expected to boost coverage, with 23 economies on the continent lacking a rating from the three big agencies, the AU said.
Rating experts said the success of the initiative will hinge on the perceived credibility of the new agency, especially in times of crisis.
“Credibility will be the biggest issue that we’ll face as Afcra – we aim to make our methodologies transparent, and in being transparent, it’s so they can be reproducible, which is one of the articles of our incorporation,” said Sifiso Falala, the interim chief executive officer of Afcra.
