Moody’s Upgrades Kenya’s Ratings to B3 as Default Risk Eases
Moody’s Ratings has today upgraded the Government of Kenya’s (Kenya) local and foreign currency long-term issuer ratings and foreign currency senior unsecured debt ratings to B3 from Caa1 and changed the outlook to stable from positive.
The global ratings agency said the upgrade to B3 reflects its view that Kenya’s near-term default risk has declined.
Kenya’s external liquidity has strengthened, Moody’s said, reflected in higher foreign-exchange reserves, a narrower current account deficit, and more stable exchange rate.
The rating note said Kenya has returned to external bond markets and used the proceeds to execute liability management operations that smooth the external maturity profile and reduce near-term refinancing risks.
Together, these developments have eased balance of payments pressures and increased funding flexibility. Improved domestic financing conditions further support the government’s ability to fund sizeable fiscal needs in the local market, reducing immediate reliance on external financing.
At the same time, the rating level remains constrained by weak debt affordability and limited progress on fiscal consolidation, reflecting high domestic borrowing costs and political and social constraints that hinder a durable reduction in the fiscal deficit. As a result, large fiscal deficits heighten Kenya’s sensitivity to changes in financing conditions.
The stable outlook reflects Moody’s expectation that Kenya will sustain the recent improvements in external liquidity and funding flexibility.
Kenya’s relatively large and diversified economy and solid medium-term growth potential provide some capacity to absorb shocks, but a long a track record of recurring revenue underperformance and weak fiscal execution constrain fiscal policy effectiveness.
“Under our baseline, the fiscal deficit will remain close to 6% of GDP, with debt broadly stable at around 67% of GDP”.
Ratings analysts explained that heavy reliance on domestic borrowing supports near-term financing capacity, but high domestic interest rates will keep the interest costs elevated and constrain already very weak debt affordability.
Concurrent with today’s rating action, Kenya’s local currency ceiling has been raised to Ba3 from B1, while the foreign currency ceiling has been raised to B1 from B2.
The three-notch gap between the local currency ceiling and sovereign rating reflects Kenya’s relatively weak institutions and policy predictability and high political risk set against a relatively small footprint of the government in the economy and limited external imbalances.
The foreign currency ceiling also remains one notch below the local currency ceiling, reflecting relatively low external debt and an open capital account, which reduce the incentives or need to impose transfer and convertibility restrictions in scenarios of intensifying financial stress.
Kenya’s external liquidity has strengthened markedly, supporting its capacity to meet external debt-service obligations over the next several years and reducing near-term default risk.
International reserves rose to $12.2 billion at year-end 2025, equivalent to 5.3 months of import coverage, up from $9.2 billion at year-end 2024. Higher reserves enhance the sovereign’s capacity to absorb shocks and ease external liquidity pressures.
Reserve accumulation has been supported by the central bank’s net foreign currency purchases alongside stronger foreign-exchange inflows. The current account deficit narrowed to 1.3 percent of GDP in 2024 from 5.2 percent in 2021, driven by a larger services surplus, higher remittances, and stronger goods exports.
These developments have reduced underlying balance of payments pressures and created space for reserve accumulation. While we do not expect reserves to rise materially beyond current levels, given a projected widening of the current account deficit to around 3 percent of GDP, existing buffers are adequate to manage near-term maturities.
Nevertheless, with around half of government debt denominated in foreign currency, fiscal metrics remain exposed to exchange-rate movements, which could weaken debt dynamics if external conditions were to deteriorate.
Also, Kenya has successfully accessed international capital markets, increasing funding flexibility and reducing near-term external refinancing risks.
In 2025, the government completed two eurobond issuances totaling $3.0 billion and used part of the proceeds to buy back $1.2 billion of bonds maturing between 2026 and 2028.
These transactions have smoothed the external maturity profile and effectively pushed the next large eurobond maturity to 2030. Looking ahead, sustaining market access and pursuing further liability management, when market conditions allow, will remain important given the still sizeable external amortization schedule.
Kenya faces external amortizations of around $2.5 billion to $3.0 billion per year over the remainder of the decade, keeping refinancing needs elevated and leaves the credit profile sensitive to shifts in investor sentiment.
“We expect the government to continue relying on a mix of external financing sources, including concessional multilateral and bilateral funding alongside periodic market-based borrowing”, Moody’s analysts said.
The ratings agency said the durability of market access at affordable yields will depend on continued macroeconomic stability, progress on fiscal consolidation, and consistent policy implementation.
It added that Kenya’s improved domestic financing conditions have strengthened capacity to fund large fiscal needs in the local market.
Moody’s said lower government borrowing costs and strong demand for government securities have enhanced the government’s ability to meet sizeable fiscal financing requirements in the domestic market, reducing near-term reliance on external disbursements, which can be uncertain in timing.
Monetary easing and improved policy transmission have supported better liquidity conditions and stronger investor demand for government securities.
Bond auctions have remained oversubscribed through the fiscal year ending June 30, 2026 (fiscal 2026), even as domestic issuance has increased, indicating improved market absorption capacity.
Treasury bill yields declined to below 8% in December 2025 from 9.9% in December 2024, while the average interest rate on newly issued Treasury bonds fell to around 13.5% in the first half of fiscal 2026 from nearly 15% in the prior fiscal year.
Kenya’s financing strategy relies heavily on the domestic market, which supports near-term execution, but exposes the sovereign to changes in domestic financing conditions.
Recent revenue shortfalls reinforce our expectation that deficits will remain elevated in our baseline and that durable fiscal consolidation will be difficult to sustain, particularly as the 2027 election cycle approaches.
“We expect the fiscal deficit to remain close to 6% of GDP in our baseline, with roughly three-quarters financed domestically, implying net domestic financing above 4.5% of GDP. This is elevated by Kenya’s historical standards”.
Longer-term domestic borrowing costs remain high, and the earlier pace of yield declines has moderated, limiting the scope for rapid improvement in debt affordability. Our baseline assumes domestic interest rates average around 12%, below prior levels, which should ease borrowing costs at the margin. However, large and persistent financing needs and a high domestic funding share will continue to constrain affordability.
Debt affordability will remain among the weakest for Moody’s-rated sovereigns, with interest consuming more than 30% of government revenue. In this context, improved domestic market conditions reduce liquidity risk, but will not, on their own, create meaningful fiscal space.
The stable outlook reflects expectations that recent improvements in external liquidity and financing conditions will be sustained, with risks around the baseline broadly balanced, Moody’s said.
On the upside, stronger-than-expected economic growth or more effective delivery of fiscal consolidation, broadly in line with the government’s medium-term fiscal projections, could support a faster improvement in debt affordability and financing flexibility.
The National Treasury envisions administrative reforms and restraint in recurrent spending, reducing the deficit toward 3% of GDP by the fiscal year ending June 30, 2030 (fiscal 2030), bringing the debt-to-GDP ratio below 60%.
Downside risks to the outlook include fiscal deficits widening relative to Moody’s baseline as a result of revenue shortfalls or higher-than-expected spending, which would place debt on an upward trajectory. Larger fiscal deficits would weaken debt affordability and constrain financing options, including through higher borrowing costs. Fidelity Bank, Access Drive Momentum, Investors Gain N126bn
