Fitch Affirms Kenya at ‘B-‘ with Stable Outlook
Fitch Ratings has affirmed Kenya’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook. This higher level of credit risk indicates that the ratings agency believes there is a material default risk for Kenya when it comes to repaying its foreign currency debts, though a limited margin of safety remains
According to the rating note, Kenya’s ‘B-‘ rating reflects strong medium-term growth prospects, a diversified economy, and a strengthening of the monetary policy framework.
These strengths are balanced against weak governance indicators relative to peers, high and rising debt servicing costs, high external indebtedness underpinned by challenges to fiscal consolidation, as well as a high level of informality and political and social challenges constraining government revenue mobilisation.
Fitch highlighted that the country’s external liquidity pressures have moderated following the government’s early settlement of a USD2 billion Eurobond maturity in February 2024 and efforts to strengthen the monetary policy framework.
These efforts, as per the rating note, have attracted higher portfolio inflows, and, together with higher export and tourism receipts, strong remittances, official loans, and recent FX purchases by the Central Bank of Kenya (CBK), they have strengthened external buffers and contributed to a stronger currency. FX reserves stood at USD11.1 billion at the end of June, up from USD9.2 billion at the end of 2024.
“We project that the current account deficit (CAD) will widen in 2025, to 2.5% of GDP from 1.3% in 2024, on higher imports and external debt service costs.
“The trend of CADs largely financed by official borrowing has led to a buildup in net external debt, which we forecast to remain above 40% of GDP in 2025-2026, nearly double the ‘B’ median.
“The combination of CAD and high external debt obligations will pressure reserves, which we project will decline to USD10.2 billion by end-2025, bringing reserve coverage to 3.8 months of current external payments, below the projected ‘B’ median of 4.4 months”, Fitch said.
Ratings analysts expect government fiscal slippage to persist in the financial year ending June 2026 (FY26), with the budget deficit reaching 5.2% of GDP, 0.5pp higher than the government’s budget target, and higher than the projected ‘B’ median of 3.6%.
This follows fiscal slippage reported in FY25, when the deficit reached 5.8% of GDP, 2.5pp higher than the government’s initial budget target as expenditure growth outpaced revenue.
The FY26 budget targets nearly 1pp reduction in expenditure, to 22% of GDP, but Fitch expects rising debt service costs, limited progress in strengthening spending controls and increasing social and security demands to limit planned reductions.
Fitch maintains a conservative revenue outlook due to expectations of revenue shortfalls consistent with Kenya’s record of underperformance and gaps in public financial management.
“We project total revenue will increase slightly, to 17.2% of GDP in FY26, remaining below the government’s target of 17.5% and ‘B-‘ rated peers of 17.7%.” Underperformance in revenue collection continued in FY25, estimated at 2.3% of GDP below its initial target and 0.4% of GDP below the supplementary budget III target.
Fitch does not expect measures under the recently enacted Finance 2025 Act to add material revenue to GDP. The new law does not introduce new taxes or raise headline tax rates, given strong public opposition and concerns over renewed violent social unrest.
Instead, it focuses on measures to strengthen tax administration, including digitisation initiatives, and reduce tax expenditures, which accounted for 3.4% of GDP in 2023. However, Fitch ratings analysts expect progress to be limited due to high implementation risk and persistent revenue leakages.
“We assume that the FY26 budget deficit will be financed through a mix of domestic and foreign borrowings, with the greater reliance on domestic sources exerting pressure on domestic interest rates”.
Kenyan government plans to secure nearly USD5 billion, which is about 3% of GDP, through a mix of official and commercial borrowings in FY26, about one-third of which is expected in concessional loans, specifically from the World Bank and the African Development Bank, but not the IMF.
The recent cancellation of the IMF arrangement has introduced uncertainty over new IMF financing from the institution. Further uncertainty surrounds the government’s ability to meet reform criteria under the World Bank’s Development Policy Operation (DPO) programme, posing risks to potential DPO disbursement.
In the absence of DPO funding, Fitch anticipates that the government will increase reliance on commercial borrowing, including a possible issuance of panda bond, sustaining high external financing costs.
Kenya’s debt costs have risen due to the government’s increasing reliance on domestic financing and higher non-concessional borrowing.
“We expect interest expenditure to rise due to higher domestic issuance, with the interest/revenue ratio rising to 33% in FY26 and FY27, from 31% in FY24, well above the ‘B’ median forecast of 15%.
“We estimate that government debt/GDP declined to 66% in FY25, from 71% in FY23, mainly linked to a stronger shilling. We expect the ratio to decline marginally, to 64% by FYE26, due partly to stronger nominal GDP growth, Fitch said.
Kenya’s persistent challenges in revenue mobilisation have largely resulted in the accumulation of pending bills, according to Fitch. Outstanding public sector claims amounted to KES665 billion between end-June 2005 and end-June 2022, mainly from state corporations.
Uncertainty surrounds the arrears accrued after June 2022, and analysts expect the amount to remain high over the short term despite efforts to address gaps in public financial management.
Fitch projects real GDP growth of 4.9% in 2025, up from 4.7% in 2024, driven by a rebound in private sector activity, even as the government streamlines expenditure.
Kenya’s Inflation fell to 4.5% in 2024, within the CBK target range of 2.5%-7.5%, from 7.7% in 2023 due to lower food and energy prices and a stronger shilling, prompting six rate cuts, to 9.75%, since August.
“We expect inflation to remain around the midpoint of the CBK’s target range, potentially allowing further rate cuts, although the bank may take cautious moves to support the currency,” Fitch said. Access Holdings Inches Near 52-Week High on Huge Trading Volume
