Fitch Ratings has revised the Outlook on Kenya's Long-Term Foreign-Currency Issuer Default Rating (IDR) from Stable to Negative, affirming the IDR at 'B'. The revision to Negative is due to heightened external financing challenges amid high funding demands, a weakening of international reserves, rising financing costs, and fiscal trajectory uncertainty. These issues are balanced by Kenya's commitment to fiscal consolidation guided by the IMF programme and strong medium-term growth prospects.

External debt service is expected to sharply increase to USD4.3 billion in FY24, exacerbated by a USD2 billion Eurobond maturity. Market conditions may remain unfavorable for the Kenyan government's plan to refinance the Eurobond in external markets. Gross international reserves declined to USD7 billion, below the projected 'B' median.

Government debt rose to 71.0% in FY23 due to the Kenyan shilling's 16% depreciation against the US dollar. Domestic financing conditions have tightened due to Kenya's increased reliance on it, resulting in high and rising debt service costs. Despite the government's commitment to fiscal consolidation, budgetary spending cuts are likely to be offset by increasing government spending commitments.

Political instability is also present, with ongoing social pressures including sporadic protests over alleged election rigging. Inflation has been consistently above the Central Bank of Kenya's inflation target band, forecasted to rise to 8.0% in 2023, before falling below 7.0% in 2024. Despite these challenges, Kenya's economic resilience is evident with a forecasted real GDP growth rebound to 5.2% in 2023.

Downgrade factors include greater external financing strains, a rapid increase in government debt, or a serious deterioration in domestic social and political stability. Improvement factors include a sustained easing of external financing constraints and a successful fiscal consolidation strategy implementation.