Kenya’s strengthened macroeconomic buffers, including a narrower current account deficit and sizable official reserves, have helped the country absorb shocks from the US-Israel war on Iran, sustaining its assessment of being at a lower risk of debt default.
Sovereign credit ratings agency Moody’s notes that its recent upgrade of Kenya as a long-term foreign currency sovereign credit rating from “Caa1” to “B3” in January has largely held firm through the Middle East crisis which has resulted in a sharp spike in fuel prices.
Kenya’s usable foreign currency reserves have come under pressure but have largely held above five months of import cover, standing at Sh1.7 trillion ($13.14 billion) as per the latest CBK data while the current account deficit has expanded moderately to 2.6 percent of GDP through 12 months to April 2026 from 1.7 percent at the same time last year.
The Kenya shilling has held steady, trading within a narrow-bound range of 129 to 130 units against the US dollar while the country’s Eurobond yields remain in single digits, mirroring resilience against external shocks.
“Kenya entered the shock from a position of strength with the current account having narrowed significantly. It has also helped to have a stable exchange rate leading to the shock as this has not been a time when the currency is weakening or when the central bank is having difficulties in terms of keeping inflation under control,” said David Rogovic, Vice President and Senior Credit Officer at Moody’s Ratings.
“We have, however, seen a modest deterioration in the growth outlook which is not uncommon for countries that are commodity importers and have also seen inflation pick up again.”
Growth for Kenya is expected to moderate in 2026 on the backdrop of the Middle East crisis with the CBK revising its growth projection to 4.9 percent from 5.3 percent while the National Treasury sees growth at a flat five percent.
The slower-than-expected growth outlook comes amid a weaker revenue projection which has deteriorated further with the Iran war.
The combination of weaker revenue and higher spending requirements is expected to see the National Treasury running a wider fiscal deficit at 6.4 percent of GDP in the current 2025/26 fiscal year from the prior year’s 6.1 percent as the consolidation path deviates from previous estimates of sub-five percent.
The wider deficit will see Kenya increasingly turn to borrowing to plug the hole where it holds a bias for the domestic credit markets.
Net domestic financing is expected to cover Sh995.7 billion of the Sh1.11 trillion borrowing requirement for the next fiscal year starting July 1 while the projection for net foreign financing has been set at Sh116.2 billion.
Despite its preference for domestic credit markets, Kenya has a variety of funding options available including tapping the international capital markets, Samurai bonds and funding from multilateral institutions like the World Bank and the International Monetary Fund (IMF).
Kenya’s long awaited Sh97 billion ($750 million) loan from the World Bank’s Development Policy Operations (DPO) is for instance set to be disbursed this Friday.
The country at the same time remains in discussions with the IMF over a new funded programme.
Moody’s has underlined the importance of Kenya maintaining access to international capital markets even as it finds multiple funding sources.
The National Treasury has mainly leveraged the external capital markets to refinance near-term maturities and conducted two Eurobond buybacks in 2025, helping it earn a ratings bump from Moody’s in January.
“This is a country that would likely need to maintain market access. The IMF has in the past been an important source, but Kenya is close to reaching its limit in terms of its quota,” added Mr Rogovic.
“Whether Kenya accesses the markets now, I would say it’s a tradeoff. It’s a balance between the cost of funding in the market, the level of reserves in place and access to other sources of financing.”
