Debt headache for Ruto amid credit downgrade

President William Ruto’s administration is now facing a fresh headache in the form of higher borrowing costs after a third global rating agency downgraded Kenya’s credit rating in as many months, further limiting the country’s options for financing its growing debt obligations.

The latest downgrade by S&P, which cited concerns over the government’s fiscal consolidation efforts and mounting debt levels, comes at a precarious time for the administration. Ruto is grappling with the fallout from protests over his economic policies, which have eroded public trust and undermined his agenda.

The downgrade follows similar cuts by the other two major rating agencies since early July. Moody’s downgraded Kenya’s credit rating further into junk status in July, while Fitch downgraded sovereign rating to “B-” from “B” earlier this month, sending Kenya’s dollar bonds lower.

Analysts said yesterday, that the confluence of these challenges - the credit rating downgrades, the unrest, and the broader economic headwinds - has left the Ruto government in a perilous position as it seeks to rally international investor confidence and secure the financing needed to fund its ambitious development plans.

They warned that the government’s capacity to borrow, both domestically and globally, will be severely constrained, potentially forcing it to make difficult choices between servicing debt, funding critical public services, and financing job-creating infrastructure projects - a delicate balancing act that could further strain the administration’s relationship with Kenya’s restless youth.

As Ruto scrambles to restore stability and revive the economy, the spectre of mounting debt and limited access to credit looms large, posing a significant test to his leadership and the long-term viability of his reform agenda, analysts said.

Global credit ratings agency S&P downgraded Kenya’s rating on Friday to “B-” from “B,” citing the recent repeal of the East African country’s 2024/2025 Finance Bill, which it said will slow its fiscal consolidation.

The setback comes as Ruto’s government faces growing pressure to address the aspirations of the country’s burgeoning youth population, often referred to as “Generation Z.” 

The Ruto government has vowed to prioritize economic reforms and fiscal discipline, but critics say progress has been slow, leading to growing disillusionment among the youth who had pinned their hopes on the administration’s promises of change, analysts and sections of youth say.

“We were promised a new dawn, but so far it has been more of the same,” said Nairobi-based university student Amina Juma. 

While issuing its decision, S&P pointed to the government’s decision to cancel planned tax increases in the Finance Bill, 2024 following youth protests and instead rely on spending cuts to reduce the fiscal deficit.  

The agency said Kenya’s ability to increase revenues and make its debt more affordable has declined significantly.

“The downgrade reflects our view that Kenya’s medium-term fiscal and debt outlook will deteriorate,” said S&P.

“Although immediate external liquidity pressures have receded slightly, Kenya’s structurally large external imbalances remain a key vulnerability,” S&P added.

Ruto discarded the government’s finance bill for the year, which contained tax hikes worth Sh346 billion, following the protests that resulted in more than 50 people being killed.

The downgrade and negative outlook mean the government has to pay higher interest rates when it borrows domestically and internationally.  

This is a challenge as Kenya is already dealing with high domestic borrowing costs, even as inflation has eased and the Shilling strengthened.

The higher borrowing costs will make it harder for Kenya to service both its domestic and foreign debt. 
The downgrade also risks limiting the country’s access to external funding, including from multilateral lenders. This high-cost borrowing environment is a major challenge for President Ruto’s administration.

Analysts now say the government must balance fiscal consolidation with maintaining social stability, but with limited options to raise revenues, it may have to rely more on expensive domestic and foreign financing.

As the Ruto administration navigates these turbulent times, analysts warn that failure to deliver on its reform agenda and youth-focused initiatives could have far-reaching political and social consequences.

“This ratings downgrade will only compound the administration’s woes as it struggles to restore confidence,” said Nairobi-based analyst Fatuma Chege.