NSE hit as Iran-Israel war threatens economy

The escalation of hostilities between Israel and the United States on one side and Iran over the weekend has sent shockwaves through Kenya's economy, with the Nairobi Securities Exchange (NSE) taking an early hit Monday even as the shilling showed surprising resilience against the dollar.

The coordinated missile and drone strikes by US and Israeli forces on Iranian military and nuclear sites, which killed Supreme Leader Ayatollah Ali Khamenei, have triggered fierce retaliation from Tehran, rocking global supply chains and throwing critical trade routes into jeopardy. The conflict expanded to Lebanon by its third day as Israel and Hezbollah exchanged fire, while Iranian strikes hit airports in Bahrain and Dubai, causing damage and casualties.

For Kenya, which relies on the Middle East for the bulk of its fuel imports and maintains growing commercial ties with both regions, the conflict presents a new shock to an economy still recovering from recent inflationary pressures, analysts cautioned.

The Nairobi bourse felt the immediate impact of the escalating conflict on Monday, with the All Share Index declining 0.73 points to settle at 215.36. Turnover retreated to Sh922 million on a volume of 36 million shares, down from Sh1.2 billion recorded in the previous trading session, signaling investor caution amid heightened geopolitical uncertainty.

Despite the equity market turbulence, the Shilling demonstrated relative resilience against the US dollar. The Central Bank of Kenya quoted the shilling at 129.02 against the greenback on Monday, although this represented the previous trading day's rate, with a clearer picture of the currency's performance expected to emerge on Tuesday as more transactions are processed and the full impact of the weekend's events filters through the financial system.

Currency traders cautioned that sustained pressure on oil prices and potential disruptions to diaspora remittance flows could test the currency's resilience in the coming weeks.

The most immediate threat to Kenyan households comes from the energy market. Murban crude, the benchmark for Kenya's refined fuel imports, has surged more than 10 per cent since the strikes began, with spot premiums hitting more than three-year highs. 

The Strait of Hormuz, a narrow waterway through which about a fifth of the world's global oil output passes, has effectively become a flashpoint. Iran on Sunday closed the strait, bringing international shipping to a standstill and sending oil prices soaring. At least 150 vessels, including oil and liquefied natural gas tankers, dropped anchor in the strait and surrounding waters, shipping data showed.

Spot premiums for Middle East crude benchmarks Dubai, Murban and Oman surged to more than three-year highs on Monday, with cash Dubai's premium hitting $5.91 per barrel – jumping from Friday's close of $1.15 and reaching the highest level since September 2022.

Data from shipping sources indicates that freight costs for Middle Eastern routes have spiked dramatically, with some supertanker rates jumping nearly 60 per cent as vessel owners pause offerings to assess risks.

This puts immense pressure on Kenya's government-to-government fuel supply deal with Saudi Aramco, the Emirates National Oil Company (ENOC), and the Abu Dhabi National Oil Company (ADNOC). While the pact, renewed in April 2025, guarantees supply at negotiated rates, the sharp increase in freight and insurance costs could test the appetite of Gulf suppliers to absorb the additional expenses, threatening to upend the price stability Kenyans have recently enjoyed.

Oil giant Saudi Aramco on Monday shut down its 550,000 barrel-per-day Ras Tanura refinery as a precautionary measure following a drone attack.

The price of key petroleum fuels soared on Monday as markets opened, with the jump in diesel futures prices outpacing the surge in crude prices as supply from the Middle East is in disarray. Gasoil (diesel) futures prices on the Intercontinental Exchange hit a two-year high, soaring by 17 per cent at opening, even beating the 13 per cent jump in Brent crude prices, which topped $80 per barrel.

Diesel faces the most acute physical pressure in the near term, according to energy analysts at Kpler, due to several reasons. They noted that gasoil is the primary fuel for military logistics, it is regionally concentrated in supply, and it is the hardest petroleum product to replace with an alternative supply quickly. A total of 10.3 per cent of global seaborne gasoil trade transits the Strait of Hormuz, as well as 19.4 per cent of jet fuel and 16 per cent of gasoline and naphtha trade by sea.

Local economists warn that any sustained disruption will stoke inflation. Most factories in Kenya rely on diesel-powered machines, while most citizens use fuel-powered vehicles for daily transport. An increase in oil prices or a shortage of oil could impact many day-to-day activities.

In the February 2026 EPRA review, Super Petrol retailed at Sh178.28, Diesel at Sh166.54, and Kerosene at Sh152.78. However, with global oil prices projected to surge past $100 per barrel if the Strait of Hormuz remains disrupted, analysts warn petrol prices could cross Sh250 per litre.

The Energy and Petroleum Regulatory Authority uses a pricing model that reflects global trends with a lag, meaning the full force of the latest price spike is yet to be felt by consumers.

The aviation industry faces its most severe disruption since the COVID-19 pandemic, with airlines Kenya Airways suspending flights to the UAE until further notice, while Emirates, Qatar Airways and Etihad have issued similar advisories.

Thousands of flights have been cancelled and, in some cases, diverted, leaving hundreds of thousands of passengers stranded. The European Union Aviation Safety Agency extended the validity of its existing advice warning airlines to avoid the region until March 6. The airspace of countries including Iran, Iraq, Israel, Qatar and the UAE remained closed on Monday over security concerns.

In Abu Dhabi, debris from an intercepted drone targeting Zayed International Airport killed one person and injured others. Dubai International, the world's busiest airport for international traffic, was among those hit, causing what the airport authority said was minor damage, with four staff sustaining injuries.

Freight forwarders have warned customers to expect delays, disruptions and rising costs. In an update, world-leading airfreight forwarder DSV warned customers to expect extended transit times, irregular schedules and rate increases after carriers suspended Middle East operations.

"As the situation remains uncertain, further adjustments to flight schedules and network coverage may occur at short notice," the forwarder warned. "Customers should anticipate potential delays or even cancellations, space constraints, and short-notice rate adjustments in the coming days and weeks."

DSV added that the current disruption is expected to have broader implications beyond the Middle East region as a result of aircraft redeployments, route extensions, service suspensions and a tightening of available capacity across key trade lanes.

The Port of Mombasa is bracing for congestion as shipping lines alter their schedules and containers are misplaced due to route changes, leading to potential demurrage charges and delays for importers.

The deeper, often-overlooked connection lies in the lives of thousands of Kenyan workers in the Middle East. Countries such as Saudi Arabia, the UAE, Qatar, and Kuwait have become major destinations for Kenyan migrant labour. Their remittances have become a lifeline for families back home.

According to the Central Bank of Kenya, diaspora remittances now rank among the country's largest sources of foreign exchange, often surpassing earnings from traditional exports such as tea and tourism. Saudi Arabia holds the top position in the region, with remittances growing rapidly from $122.96 million in 2021 to over $400 million by 2024, driven by an influx of Kenyan workers as domestic staff, security guards, and in other service sectors.

However, in 2025, remittances from Saudi Arabia fell by 25.06 per cent to $302.1 million, allowing the UK to overtake it as the second-largest source overall after the US. This decline was attributed to higher transaction costs and labor market reforms.

A prolonged conflict in the Gulf could slow economic activity in those countries, disrupt labour markets, or trigger stricter migration policies. Across rural Kenya, remittances pay school fees, fund medical bills, and sustain entire families.

Kenya's tea sector faces heightened uncertainty as the escalating conflict threatens supply chains to key Gulf markets. Tea, Kenya's top agricultural export, is particularly vulnerable. In 2024, Kenya exported approximately 13 million kilograms of tea to Iran, valued at Sh4.26 billion, according to the Tea Board of Kenya. Coffee, tea, and spices accounted for over 90 per cent of Kenya's total exports to Tehran.

"Iran ranks among the top ten importers of Kenyan tea," the Kenya Tea Board said earlier. While Pakistan remains the leading destination for Kenya's tea exports, accounting for 34.7 per cent of total export volume, Gulf states and Iran form a crucial secondary market that helps balance supply.

The conflict has already disrupted shipping through the Strait of Hormuz and regional air corridors, translating into higher freight rates, longer transit times, and elevated insurance premiums. For Kenyan tea exporters operating on thin margins, such cost pressures could undermine competitiveness against producers in India and Sri Lanka.

Trade data shows Kenya's exposure to the region is substantial. In 2024, Kenya imported goods worth Sh554.45 billion from the Middle East while exporting only Sh164.65 billion to the same region, imports nearly four times higher than exports, creating a structural vulnerability. The UAE remains Kenya's largest Middle Eastern market, absorbing goods worth Sh101.34 billion in 2024, followed by Saudi Arabia at Sh27.2 billion, largely tea, horticulture and meat products.

Amid the tensions, Iranian Ambassador to Kenya Ali Gholampour sought to reassure Nairobi, stating that Iran's missiles will not reach Kenyan territory. He stressed that Iran's missile capability has been deliberately limited to a maximum range of 2,000 kilometres to demonstrate its peaceful and defensive posture.

The ambassador acknowledged that a prolonged war could have economic repercussions globally, including in Kenya. He noted that in situations of all-out conflict, trade routes and commercial transportation corridors are often disrupted, affecting countries far from the battlefield. He emphasized that Tehran has shown restraint and does not intend to interrupt the flow of essential commodities, including energy supplies destined for Africa.

The potential economic fallout has not been lost on the government. The National Treasury, in its recent presentation to the National Assembly, highlighted geopolitical tensions as a key risk to the fiscal outlook, emphasizing a "difficult balancing act" in shielding the economy from external shocks while maintaining growth. The African Union has also sounded the alarm, with Commission Chairperson Mahmoud Ali Youssouf warning that further escalation could destabilise energy markets and strain the economic resilience of vulnerable nations like Kenya.