Global ratings agency casts doubt on Mbadi debt strategy

Global credit ratings agency Fitch Ratings has cast doubt on Treasury Cabinet Secretary John Mbadi’s strategy to navigate Kenya’s severe debt crunch, questioning whether the country’s ambitious liability management operations can be successfully implemented. 

The agency’s assessment, reviewed by The Standard, joins a growing chorus of concern over the country’s fiscal health, putting Treasury mandarins in the spotlight.  

The Fitch report details plans central to Mbadi’s agenda, including a novel $1 billion (Sh129 billion) debt-for-food swap with the World Food Programme (WFP) and a proposed conversion of Chinese debt into renminbi, the Asian country’s currency. 

While these could reduce the sovereign’s debt-service burden, Fitch cautioned that their success remains uncertain. 

“These liability management operations would make Kenya’s amortisation profile less lumpy, lower rollover risk and reduce near-term debt-service costs,” says Fitch. 

“However, we believe the authorities will face implementation challenges, both negotiating favourable terms with debt holders (where relevant) and financing the plans.” 

The agency specifically noted that it’s unclear whether Chinese authorities will support the renminbi proposal, which could affect at least 20 per cent of Kenya’s annual debt payments. 

Fitch’s skepticism on the debt swap is significant, as such agreements, where debt is forgiven for commitments to invest in development projects, can be complex to execute. 

“The China Exim deal could affect at least 20 per cent of Kenya’s current annual debt-service payments,” says Fitch. 

“However, it remains unclear whether the Chinese authorities will support the proposal.” 

Mbadi’s core strategy involves smoothing a lumpy repayment schedule that includes a $300 million syndicated loan due in December 2026 and a $1 billion Eurobond maturing in 2028. 

Fitch noted the Treasury’s recent domestic bond buybacks and plans to prepay 2026 maturities as positive steps but underscored that they are fraught with execution risk. 

The Fitch assessment echoes concerns recently voiced by Moody’s Ratings and Kenya’s own Controller of Budget, Margaret Nyakang’o, creating a chorus of caution around the government’s borrowing. 

Nyakang’o recently revealed public debt hit a record Sh11.73 trillion by June 2025. She also highlighted that debt servicing consumed a staggering Sh1.59 trillion in the last financial year.

In the latest National Government Budget Implementation Review Report for FY 2024/25, the Controller noted that the government had significantly deviated from its own borrowing policy, with domestic borrowing outpacing external loans despite a medium-term strategy recommending a balanced 50:50 mix.

As of June 2025, domestic debt stood at Sh6.33 trillion, making up 54 per cent of total debt, while external debt was Sh5.4 trillion (46 per cent).

This marks a clear breach of the government’s 2024 Medium-Term Debt Management Strategy, which aimed for an equal split to mitigate exchange rate risks and borrowing costs, said Nyakang’o.

For the Ruto administration and economic managers at the Treasury led by Mbadi the urgent task remains balancing the need for development funding with prudent debt management to prevent soaring borrowing costs from undermining the country’s economic prospects.

Fitch’s skepticism on fiscal discipline is a key concern. The successful execution of these operations is heavily contingent on securing a $750 million World Bank budget support loan. 

This funding is not guaranteed, as it is tied to the government implementing “tough” reforms to strengthen expenditure controls—an area where Fitch believes there has been “limited progress.” 

The report poses a direct challenge to Mbadi’s fiscal management. 

“Conducting the exercises would be tougher without deeper spending restraint and timely funding inflows from the $750 million that the government anticipates from the World Bank’s Development Policy Operations (DPO) budget support facility,” says Fitch. 

“Disbursement of the DPO funding is contingent on the implementation of several reforms, including measures to strengthen expenditure controls, which may be tough.” 

Fitch expects Kenya’s budget deficit to remain high at 5.2 per cent of GDP this financial year, driven by rising interest costs. 

It warns that should the World Bank funding fall through, the Treasury may be forced into more expensive commercial borrowing, exacerbating the very problem it is trying to solve. 

“If the government fails to secure DPO funding, which is not our baseline assumption, it could increase reliance on more expensive commercial borrowing to meet external financing requirements,” says Fitch. 

“We expect Kenya’s debt-service burden to rise in the next two years due to higher domestic issuance, with the interest/revenue ratio rising to 33 per cent in FY26 and FY27, from 31 per cent in FY24, more than double the forecast median for ‘B’ category sovereigns of 15 per cent.” 

Fitch also believes widening current-account deficits and high external debt obligations will erode Kenya’s external buffers.  

“We project FX reserves to fall to $10.2 billion by end-2025, the equivalent of 3.8 months of current external payments,” says Fitch. 

“This is below our projected ‘B’ category median of 4.4 months. A sharp decline in these buffers or greater external financing strains could put downward pressure on Kenya’s rating.”