Analysts see bigger selloffs if Fitch cuts Kenya credit rating

A downgrade of Kenya’s credit rating by a second ratings agency could lead to a larger market selloff, analysts have warned. This comes as Fitch is expected to release its decision this weekend, just weeks after Moody’s downgraded the country’s sovereign debt.

Global investors have been increasingly concerned about Kenya since late June, when President William Ruto rejected proposed tax hikes that would have generated an additional Sh346 billion in revenue. Moody’s responded quickly by further lowering its rating on Kenya’s sovereign debt due to concerns about the fiscal situation.

Fitch is scheduled to announce its decision on Kenya’s rating at midnight on August 3, while S&P will provide its opinion on August 23.

Investment experts caution that another downgrade could prompt foreign investors to sell off bonds, impacting both stocks and the shilling. Kevin Daly, investment director for emerging markets at Abrdn, noted that ongoing fiscal pressures and deteriorating social conditions could lead to another downgrade. Abrdn, a British firm managing over $650 billion in assets, including Kenyan sovereign debt, might be forced to adjust its investments based on ratings mandates.

Asset managers often require that bonds meet certain ratings criteria from multiple agencies. The recent Moody’s downgrade alone did not trigger significant selling due to the need for multiple agencies to issue similar ratings. However, if Fitch also downgrades Kenya, it could lead to more substantial sell-offs as Kenyan sovereign debt would be downgraded by two of the three major rating agencies.

Kenneth Minjire from AIB-AXYS Africa noted that a Fitch downgrade would have a more pronounced effect compared to Moody’s. Fitch’s last evaluation in February maintained Kenya’s rating at “B” with a negative outlook, citing large funding needs and financing risks.

High-quality or investment-grade debt is typically rated in the “A” range, while more speculative and riskier debt is rated around “B” and below. A Fitch downgrade could exacerbate foreign capital outflows, undermine investor confidence, and put further pressure on the shilling, especially as Kenya approaches a key infrastructure bond auction aimed at stabilizing the currency