Moody's has downgraded Kenya's sovereign rating deeper into junk territory, citing a diminished capacity to implement a fiscal consolidation strategy after the government dropped the Finance Bill 2024, which was intended to raise more revenue.

The downgrade to "Caa1" from "B3" reflects a significant decline in Kenya's ability to implement revenue-based fiscal consolidation, which would have improved debt affordability and placed it on a downward trend.

The credit ratings agency downgraded the country's local- and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings.

"The government's decision not to pursue planned tax increases and instead rely on expenditure cuts to reduce the fiscal deficit represents a significant policy shift with material implications for Kenya's fiscal trajectory and financing needs," Moody's said.

Last month, Kenyan President William Ruto withdrew planned tax hikes following deadly protests in Nairobi and other parts of the country.

This left the proposed budget with a deficit of over Ksh300 billion. In response, the government has implemented major spending cuts and called for austerity measures to preserve cash.

Moody's stated that while the spending cuts should narrow the fiscal deficit, it will be at a more gradual pace than previously assumed, resulting in Kenya's debt affordability remaining weaker for longer.

Kenya's previous rating of "B3" was based on the government continuing with a fiscal consolidation strategy that included significant revenue-raising measures aimed at narrowing the fiscal deficit, containing the debt burden, and stabilising debt affordability.