Kenya Wins Moody’s Upgrade as External Buffers Strengthen, but Debt Pressures Persist

Kenya has received a cautiously positive signal from global credit markets after Moody’s Investors Service upgraded the country’s sovereign credit rating, citing stronger external liquidity, reduced near-term refinancing risks, and improved macroeconomic stability. The agency raised Kenya’s rating to B3 from Caa1 and revised the outlook to stable, indicating a lower probability of default in the near term.

The upgrade reflects a marked improvement in Kenya’s external position over the past two years, including a sharp rise in foreign exchange reserves, a narrowing current account deficit, and the government’s successful return to international bond markets. However, Moody’s was clear that the country’s longer-term fiscal challenges remain significant, with high debt levels and heavy interest costs continuing to constrain public finances.

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Stronger External Buffers Drive the Upgrade

At the heart of Moody’s decision is Kenya’s strengthened external liquidity position. According to data from the Central Bank of Kenya (CBK), foreign exchange reserves rose to about KSh 1.57 trillion (US$12.2 billion) by the end of 2025, equivalent to 5.3 months of import cover. This represents a substantial improvement from US$9.2 billion a year earlier and places reserves comfortably above commonly used adequacy benchmarks.

Moody’s noted that the buildup in reserves provides a stronger buffer against external shocks, reduces vulnerability to volatile capital flows, and enhances the government’s ability to meet external debt obligations.

Current Account Deficit Narrows Sharply

Another key factor underpinning the upgrade is the dramatic improvement in Kenya’s external balance. The current account deficit narrowed to 1.3% of GDP in 2024, down from 5.2% in 2021, reflecting a structural shift in external financing dynamics.

The improvement was driven by:

• Higher diaspora remittances, which have become one of Kenya’s most stable sources of foreign exchange
• A stronger services surplus, supported by tourism, transport, and professional services
• Improved export performance, particularly in agricultural and manufactured goods

This narrowing deficit has reduced Kenya’s dependence on external borrowing to finance imports and debt repayments, easing pressure on the exchange rate and reserves.

Eurobond Issuances Ease Near-Term Refinancing Risk

Moody’s also highlighted Kenya’s successful return to international capital markets in 2025 as a pivotal development. The government completed two Eurobond issuances totalling US$3.0 billion, restoring access to external market funding after a prolonged period of elevated risk premiums.

Importantly, Kenya used part of the proceeds—about US$1.2 billion (KSh 154.8 billion)—to buy back Eurobonds maturing between 2026 and 2028. This liability management exercise pushed the next major Eurobond maturity out to 2030, significantly easing near-term refinancing pressure.

By smoothing the external debt maturity profile, the government reduced the risk of a funding cliff that could have strained reserves or forced costly refinancing.

What the Upgrade Signals

In announcing the decision, Moody’s said:

“The upgrade reflects our view that Kenya’s near-term default risk has declined, supported by stronger external liquidity and improved funding flexibility.”

In addition to the sovereign rating, the agency also raised Kenya’s:

• Local currency ceiling to Ba3 from B1
• Foreign currency ceiling to B1 from B2

These changes improve the risk perception for domestic issuers and could help lower borrowing costs for both the government and private sector over time.

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Fitch Takes a More Cautious View

While Moody’s moved to upgrade Kenya, Fitch Ratings adopted a more restrained stance. Fitch estimated gross foreign exchange reserves at KSh 1.60 trillion (US$12.4 billion) at the end of 2025 and projected coverage of about four months of current external payments in 2026, even as the current account deficit is expected to widen.

Fitch acknowledged improvements in liability management, including:

• Partial refinancing of the 2027 and 2028 Eurobonds
• Conversion of some Chinese Exim Bank debt into renminbi, generating savings of about 0.1% of GDP per year

However, the agency stopped short of an upgrade, citing rising debt service costs, fiscal slippage, and heavy reliance on domestic borrowing.

Debt Service Remains a Major Constraint

Despite the improved external picture, Kenya’s debt affordability metrics remain stretched. Moody’s and Fitch both flagged the government’s high interest burden, with more than 30% of revenue consumed by interest payments.

Fitch projects external debt service of KSh 684.0 billion (US$5.3 billion) in FY2025/26, equivalent to 3.7% of GDP. Interest costs are expected to remain well above the median for B-rated peers—roughly double in relative terms.

Public debt stands at around 67% of GDP, meaning a large share of economic output is already committed to servicing existing obligations, limiting fiscal space for development and social spending.

Domestic Financing Conditions Improve—With Limits

On the domestic front, financing conditions have eased, supporting budget execution. Treasury bill yields declined to below 8% in December 2025, down from 9.9% a year earlier, while average yields on newly issued Treasury bonds fell to around 13.5% in the first half of FY2025/26, compared with nearly 15% in the prior fiscal year.

These improvements have reduced short-term funding pressure and helped stabilise debt service costs. However, Fitch cautioned that heavier reliance on domestic borrowing will limit further yield declines, even if policy rates ease.

Sustained domestic issuance risks crowding out private sector credit and anchoring yields at elevated levels.

Why This Matters: Beyond the Rating Headline

The Moody’s upgrade is significant, but its importance lies in what it enables rather than what it declares.

1. Reduced Near-Term Default Risk

The upgrade signals that Kenya is no longer viewed as being at imminent risk of missing debt payments, easing investor anxiety and stabilising funding channels.

2. Improved Market Access

A stronger rating outlook can lower risk premiums on future borrowing and broaden the investor base for both sovereign and corporate issuers.

3. Policy Credibility Test

The upgrade rewards recent efforts to rebuild reserves and manage liabilities—but sustaining it will require continued fiscal discipline and reform.

4. Limited Fiscal Space Remains

Despite progress, high interest costs and large deficits—projected near 6% of GDP—mean Kenya remains vulnerable to shifts in investor sentiment and financing conditions.

Historical Context: A Turn in the Cycle

Kenya’s credit profile has improved after several difficult years marked by reserve depletion, currency pressure, and rising refinancing risk. The current upgrade reflects a turning point driven by:

• Rebuilding external buffers
• Proactive liability management
• More predictable exchange rate conditions

However, history shows that such gains can be fragile if fiscal consolidation stalls or external shocks re-emerge.

The Road Ahead

Moody’s expects fiscal deficits to remain close to 6% of GDP, with debt stabilising in the high-60% range of GDP. That trajectory leaves limited room for policy slippage.

Going forward, maintaining the improved credit profile will depend on:

• Sustaining reserve adequacy
• Managing domestic borrowing pressures
• Containing interest costs
• Delivering credible fiscal consolidation

Failure on any of these fronts could quickly reverse recent gains.

Conclusion: Progress, Not a Free Pass

Kenya’s upgrade by Moody’s marks a meaningful improvement in its near-term credit outlook, underpinned by stronger reserves, a narrower current account deficit, and reduced refinancing risk following successful Eurobond issuance.

But the message from rating agencies is clear: the upgrade is not an all-clear signal. High debt levels, elevated interest costs, and persistent fiscal deficits continue to weigh on the country’s long-term credit profile.

For policymakers, the challenge now is to convert this window of improved confidence into durable fiscal reform. For investors, the upgrade offers reassurance—but not complacency—in assessing Kenya’s evolving risk landscape.

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photo source: Google

By : Elsie Njenga

3rd February, 2026