Orals East Africa>Moodys downgrades Kenya on losing tax powers At the hut of the story

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— Moodys downgrades Kenya, penciling in default

— Contagion, as more tax proposals face opposition

— KRA misses tax target

Costly casino

Kenya will need to borrow more money from local and international banks at a very expensive rate following the withdrawal of the Finance Bill that ratings agency Moodys is afraid the country may even be forced to default and restructure debt.

Domestically, Kenya is already struggling to get buyers for Treasury bonds eve after the average interest rate on newly issued Treasury bonds in fiscal 2024 jumped to 17.8 percent, up from 14.4 percent in fiscal 2023.

The Eurobond markets are all but closed with Kenya’s issues all trading above 10 percent on the dollar loans, meaning the government can simply not afford.

This is happening even as the relationship with the International Monetary Fund (IMF) which had been willing to lend to Kenya and unlock other multilateral funding, may be compromised by decision to withdraw tax proposals pushed by the Fund.

Moodys says, the expect delays in IMF funding would increase the reliance on the domestic market for fiscal financing even further.

“The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.

Moody's Ratings (Moody's) has downgraded the Government of Kenya's (Kenya) local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Caa1 from B3. The outlook remains negative.

Kenya cannot raise taxes

Moodys 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.

The firm said, in the context of heightened social tensions, they do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future.

Already, the Ministry of Roads and Transport is talking about delaying proposals to increase the road levy from Kesh18 per litre of super petrol and diesel to Kes25 per litre for repairing and maintaining the country's vast road network.

Kenya is also being be pressured to withdraw new taxes imposed on various items by the East African Community (EAC) after taxes under the common external tariff (CET) came into force, reversing the gains made by shelving the Finance Bill.

As a result, the Ratings agency now expect the fiscal deficit to narrow more slowly, with Kenya's debt affordability remaining weaker for longer.

Moodys said without the planned tax measures, we expect government revenue to remain around 17 percent of GDP in fiscal 2025 rather than rise.

Laffer curve KRA

This comes as President William Ruto's first full fiscal year, which has been characterised by the introduction of unpopular tax measures that informed the anti-tax riots that recently rocked the country resulted in revenue underperformance to the tune of Kes267 billion.

The Kenya Revenue Authority (KRA) missed its target for the full year ended June declines in income tax from finance and insurance, information and communication, and manufacturing attributed to reduced profitability of these businesses.

KRA had targeted a collection of Kes2.76 trillion by the end of June 2024, which was revised downwards to Sh2.49 trillion after the Treasury tabled the second supplementary budget towards the end of the fiscal year, but only managed to bring in Kes2.22 trillion.

Moodys says overall, even taking into account tax measures implemented outside the 2024 Finance Bill, debt affordability will deteriorate due to an increase in interest payments.