Kenya Upgraded as Near-Term External Liquidity Risks Reduce –S&P
S&P Global Ratings has raised its long-term sovereign credit rating on Kenya to ‘B’ from ‘B-‘ with stable outlook while it affirmed ‘B’ short-term sovereign credit rating. The ratings agency said transfer and convertibility assessment of Kenya has been raised to ‘B+’ from ‘B’,
According to the rating note, Kenyan stable ratings outlook reflects S&P expectation that the country’s robust economic growth and reduced immediate external liquidity risks will help offset pressures stemming from high interest costs and a protracted fiscal consolidation process.
“We could lower the ratings if Kenya’s external refinancing pressures mount, likely due to a sustained decline in FX reserves, or if we perceive any future debt repurchase or securitization operations, domestic or external, to be akin to a distressed exchange”, S&P said in its latest update.
Meanwhile, Kenya credit rating could be raised, S&P indicated if ratings analysts observe a steady commitment to sustainable public finances as demonstrated by a significant reduction in fiscal deficits and interest costs beyond our base-case forecast.
“The upgrade reflects our view that Kenya’s near-term external liquidity risks have receded. External data revisions, coupled with strong performances in coffee exports and diaspora remittances, supported a narrowing of Kenya’s current account deficit to 1.3% of GDP in 2024, from 2.6% in 2023”.
S&P said these improvements strengthened Kenya’s FX reserves to a record-high $11.2 billion in July 2025, up from $6.6 billion at year-end 2023. Additionally, Kenya’s $1.5 billion Eurobond issuance and concurrent buy-back operation in February 2025 helped lower Eurobond principal repayments to $108 million annually over 2025-2027, from $300 million previously.
“We project the government’s total external debt amortizations will therefore remain manageable at $2.7 billion in the fiscal year ending June 30, 2026, and at $3.8 billion in fiscal 2027”. Ongoing country’s monetary easing has bolstered domestic funding conditions.
Since initiating its easing cycle in August 2024, the Central Bank of Kenya (CBK) has delivered seven consecutive rate cuts, lowering the policy rate by a cumulative 350 basis points to 9.5% as of August 2025.
This contributed to a decline in 91-day treasury bill yields to approximately 8% in July 2025, down from a peak of 16% in July 2024, which lowered domestic financing costs for the government, S&P said. Ratings analysts explained that the easing cycle was driven by contained inflation–which was 4.1% in July 2025–and stable exchange rate dynamics.
Although commercial banks have been slow to lower lending rates, private sector credit growth has begun to recover and it is expected to accelerate further following the government’s clearance of supplier and contractual payment arrears, which should support overall GDP growth.
“We expect social pressures in Kenya to complicate efforts toward fiscal consolidation. The 2025 Finance Bill forecasts a modest narrowing of the budget deficit to 4.7% of GDP in fiscal 2026, down from preliminary estimates of 5.8% in fiscal 2025”.
Following widespread protests in June 2024, the government was forced to roll back planned tax hikes and has since chosen to focus on widening the tax net to enhance revenue collection. Despite these efforts, fiscal consolidation is expected to remain slow, due to persistent revenue underperformance, election-related spending pressures, and partial repayment of domestic supplier arrears.
Consequently, S&P ratings analysts anticipate the budget deficit will remain elevated at 5.5% of GDP in fiscal 2026 and average 5.2% over fiscals 2026-2028.
The government will also have to rely on more expensive domestic borrowing and external commercial facilities to finance the shortfalls, keeping interest costs elevated at 33% of general government revenue over fiscals 2025-2028, according to S&P.
Kenya’s near-term access to concessional external financing remains constrained and we expect it to be supplemented by more expensive non-concessional financing. In March 2025, the IMF decided not to disburse the ninth and final review of Kenya’s extended credit facility/extended fund facility, citing insufficient progress on key fiscal and debt targets.
This decision led to the loss of $850 million in concessional financing for Kenya and has also contributed to ongoing delays in securing about $750 million in World Bank support. To compensate for this, the government tapped a $500 million multi-tranche loan from the United Arab Emirates (UAE) in May 2025, priced at 8.25%.
A new, funded IMF program may be agreed over the next year, contingent on the passage of additional fiscal consolidation measures. In the interim, Kenya has built up sufficient FX reserves and retains strong access to domestic markets and other commercial facilities, albeit at a higher cost.
These include an additional $1 billion available from the UAE loan, and likely debt-for-food swaps, sustainability-linked bonds, and Samurai, Sukuk, and Panda bond issuances.
S&P said: “Our ratings are supported by Kenya’s record of strong GDP growth, a vibrant private sector, and a diversified economy, including its large agricultural and services sectors relative to that of peers”.
Kenya also benefits from flexible monetary policy and relatively deep domestic capital markets, as well as a developed institutional framework, with strong checks and balances relative to that of other sovereigns rated in the ‘B’ category.
However, our ratings on Kenya remain constrained by the country’s relatively low GDP per capita (although it is still among the highest in the East African region), high fiscal deficits and government debt, and sizable external financing requirements.
Institutional and economic profile: Social pressures continue to constrain Kenya’s path to fiscal consolidation. Kenya has a history of strong economic growth supported by a services-led private sector and an expanding middle class.
President William Ruto’s economic policy objective is to reduce red tape while providing greater opportunities to the informal economy and small businesses, prioritizing these over large businesses and infrastructure projects. Kenya’s institutions benefit from more established and typically stronger checks and balances than those of most African peers, but ethnic tensions remain.
Despite low GDP per capita, Kenya’s economic growth has outpaced peers’ largely because of its relatively productive services-led private sector. Kenya’s real GDP expanded by 4.9% year on year in the first quarter of 2025, in line with the same period in 2024, driven by continued resilience of the agricultural sector (20% of GDP), particularly coffee and horticulture.
Additionally, the construction sub-sector (7% of GDP) returned to positive growth after a contraction in 2024, supported by the repayment of domestic supplier arrears to road contractors. “We project GDP growth will average 5.1% over 2025-2028, although risks remain, including unfavorable weather conditions and further anti-government protests impinging on economic activity”.
The government’s planned reforms have been met with mounting public resistance, despite initial efforts to promote sustainable public finances. Since taking office in September 2022, President Ruto has pledged to reduce bureaucracy and move from a top-down to a bottom-up system to provide more opportunities for the large informal and small business sectors.
In addition to his government’s focus on spurring investment in five key sectors–agriculture, small and midsize enterprises, housing, health care, and the digital economy–the president campaigned to consolidate the country’s fiscal position and place debt on a more sustainable path.
However, these efforts have faced resistance. In June 2024, nationwide youth-led protests contesting $2.3 billion in new tax measures forced the repeal of the entire 2024 Finance Bill, a first in Kenyan history. In June 2025, demonstrations erupted once more, against economic hardship and alleged police brutality.
Political fallout from the June 2024 protests triggered a cabinet reshuffle. In response to the demonstrations, Ruto dismissed all but one of his cabinet secretaries to assuage criticism of his incumbent party.
The new cabinet appointments feature some members of the opposition, including the former chair of the Orange Democratic Party, John Mbadi, as finance minister. Separately, in November 2024, Kenya’s national assembly voted to impeach former Vice President Rigathi Gachagua following allegations of money laundering and corruption. Kenya’s next general elections are scheduled for August 2027.
Strong exports and remittances, coupled with recent data revisions, have helped Kenya’s external metrics. The government updated its methodology for calculating exports of goods and services, now incorporating oil re-exports and revised travel receipts based on new survey data. These adjustments contributed to a narrowing of the current account deficit to 1.3% of GDP in 2024, from 3.7% of GDP under the old methodology.
Beyond statistical revisions, Kenya continues to benefit from robust agricultural exports–particularly of coffee, supported by favorable prices–alongside strong tourism receipts and diaspora remittances. Import payments have remained relatively suppressed as large infrastructure projects have been scaled back due to financing constraints.
S&P ratings analysts forecast a lower average current account deficit of 2.0% of GDP over 2025-2028, assuming limited downside risk from U.S. tariffs due to low export exposure – about 5.0% of total exports. Although its immediate external liquidity risks have eased, Kenya has structurally high external debt and sizable financing needs.
Analysts estimate that the economy’s external debt will average about 251% of current account receipts (CARs) over fiscals 2025-2028, largely because of sizable government and corporate external debt.
Over the same period, gross external financing needs (our key liquidity measure, which represents payments to nonresidents) is projected to average 161% of CARs plus usable reserves.
Ratings analysts estimate Kenya’s total external amortization at $2.7 billion in fiscal 2026, $3.8 billion in fiscal 2027, and $4.9 billion in fiscal 2028. Kenya’s recent Eurobond issuance partially mitigates external refinancing risks. In February 2025, the Kenyan government raised $1.5 billion through an 11-year dollar-denominated bond, issued at a coupon of 9.50% and yield of 9.95%.
The government used some bond proceeds to buy back about $580 million of its 2027 Eurobond at par plus accrued interest. “We did not consider the buyback a distressed exchange under our criteria because we view the likelihood of a conventional default as low absent this transaction”.
Despite lower-than-planned participation of 64%, the tender offer reduces Kenya’s Eurobond principal repayments to $108 million annually over fiscals 2025-2027, from $300 million. Nevertheless, locking in commercial debt at increasingly expensive rates complicates the government’s plan to mitigate FX risk and lower interest costs.
Ratings analysts expect fiscal consolidation to remain slow in the run-up to the 2027 elections. The government is targeting a fiscal deficit of 4.7% of GDP in fiscal 2026, up from estimates of 3.3% under the original fiscal 2025 budget.
Given limited political capital to raise tax rates, the government is focusing on tax administrative procedures to boost revenue collection to 17.2% of GDP. However, analysts note that revenue forecasts have historically fallen short of budgeted figures by about 1.0%-2.0% of GDP per year, reflecting the prevalence of tax exemptions and Kenya’s large informal economy.
The government has focused deficit financing on domestic sources (3.3% of GDP), including an expected Kenyan shilling (KES) 149 billion ($1.2 billion) from the privatization of Kenya Pipeline Co., which will be used to clear pending bills.
S&P forecasted a wider-than-budgeted deficit of 5.5% of GDP in fiscal 2026, narrowing to 5.1% by fiscal 2028. “Our modest consolidation forecasts incorporate some enhancements to tax revenue collection and compliance, alongside continued cuts to nonrecurrent expenditure.
“We incorporate some fiscal slippage stemming from pre-election spending and elevated interest costs. In our view, the government will have to partially compensate for financing shortfalls tied to the withdrawal of U.S. foreign assistance by cutting its own development budget”.
In 2023, Kenya received $888 million under U.S. Agency for International Development programs, primarily related to humanitarian relief, HIV/AIDS relief, health programs, and peace and security.
The government has initiated efforts to settle long-standing domestic arrears, particularly those related to the construction sector. In May 2025, the government securitized part of its fuel levy to raise funds to partially clear KES175 billion ($1.4 billion) in unpaid obligations to road contractors.
To this end, it ringfenced a KES7 per liter increase in the fuel levy to KES25 per liter and established a special purpose vehicle, which will provide future fuel levy receipts to investors. This mechanism has enabled the government to secure $600 million in upfront bridge financing from a regional multilateral agency, which analysts incorporate into the stock of general government debt.
In addition, analysts now also include the recently verified stock of payment arrears–KES229 billion –to the government’s debt burden. We understand the authorities are exploring options to securitize other levies beyond fuel.
“The government may engage in a new funded IMF program ahead of the 2027 elections, although we expect negotiations to be protracted. We anticipate continued engagement with the IMF, given its critical role as a catalyst for unlocking other official and private sector financing.
“However, we foresee ongoing delays in securing the expected $750 million loan from the World Bank Development Policy Operation until consensus is reached on public finance reforms”. President Ruto signed the Conflict of Interest and Social Protection bills into law in July 2025, meeting important preconditions for World Bank disbursements.
The government is relying heavily on domestic markets to plug budget gaps. Concessional financing shortfalls and revenue underperformance have meant the government relies increasingly on expensive domestic funding, driving interest costs to a very high level, reaching 34% of general government revenue in fiscal 2025.
Commercial banks’ exposure to the government also comprises about 38% of total assets, crowding out private sector lending. S&P expects local currency amortizations to remain elevated at about 2.6% of GDP on average over fiscals 2026-2028, up from 1.2% of GDP in fiscal 2024.
However, strong subscription rates on government securities, particularly tax-free infrastructure bonds, and monetary easing have helped reduce domestic yields. “We project that interest payments will continue to average 33% of general government revenue over fiscals 2025-2028, among the highest of all sovereigns we rate, given the government’s still large net domestic borrowing requirement”.
Kenya’s inaugural local currency bond buyback operation addressed a midyear spike in domestic maturities. In February 2025, the government completed its first domestic bond buyback worth KES50.1 billion ($387 million) on three distinct issues maturing in April and May 2025. Participation rates varied across the three bonds–from 11% to 80%–while all tendered bonds were repurchased marginally above par (including payment of accrued interest).
Analysts characterized the buyback operation as opportunistic (and not distressed) because we took the view that the government would have paid these obligations on time and in full had bondholders not participated in the switch.
“We understand the government is preparing to conduct additional local currency bond exchanges in the coming months”. About half of the Kenyan government’s debt is external and in foreign currency, exposing Kenya to external financing and FX risks. Kenya borrows most of its external debt from official lenders on concessional terms with long tenors.
Kenya’s largest external creditors are the International Development Assn. (30% of total external debt), China (16%), the African Development Bank (10%), and the IMF (8%).
External guaranteed debt is small at 1% of total debt, of which about 50% of the proceeds is provided to Kenya Airways, 30% to Kenya Ports Authority, and 20% to electricity company KenGen.
Analysts forecast some currency depreciation alongside new net issuance will contribute to an increase in overall general government debt, net of liquid assets, to about 67% of GDP over 2025-2028.
Kenya’s exchange rate has historically acted as a shock absorber during periods of stress, with the CBK intervening in FX markets occasionally to smooth significant exchange rate volatility. The Kenyan shilling has strengthened to about KES129 per U.S. dollar since April 2024, following a drop to KES163 in January 2024.
This appreciation has been driven by strong export growth, diaspora remittances, tourism inflows, and portfolio inflows linked to the February 2024 and 2025 Eurobond issuances.
The CBK has been actively purchasing excess FX from the market to boost FX reserves to $10.9 billion as of August 2025. Dollar liquidity in the interbank FX market has remained adequate, thanks to CBK reforms aimed at improving FX market transparency and enhancing price discovery.
Headline inflation averaged 4.5% in 2024, below the CBK’s mid-range of 5.0% plus or minus 2.5%. Consequently, the CBK has lowered its benchmark rate by a cumulative 350 basis points to 9.5% since August 2024, supporting a drop in domestic yields.
“We forecast that inflation will remain contained at about 4.4% over 2025-2028, but risks persist from unfavorable weather conditions and external commodity price shocks”, S&P said.
Ratings analysts expect private sector credit growth to recover after a slowdown in 2024. Credit extension decelerated to 4.0% in 2024, from 14.0% in 2023, reflecting banks’ preference for high-yielding government securities, subdued household and corporate demand, currency driven valuation effects on foreign currency loans, and structural concerns over asset quality.
Although the benchmark rate has moderated, lending rates remain relatively high, affecting households that account for nearly one-third of banks’ lending portfolio.
Banks also operate with high legacy levels of nonperforming loans, which reached 17.6% of total loans in June 2025, stemming largely from the government’s payment arrears. S&P expects Kenyan Banks asset quality to gradually improve in line with the government’s clearance of payment arrears. #Kenya Upgraded as Near-Term External Liquidity Risks Reduce –S&P Africa’s $100B Refining Opportunity Unlocks as New Capacity Surges
