Ratings agency Fitch gives Kenya a stable outlook, easing debt fears

The government received a crucial vote of confidence from Fitch Ratings on Friday last week after the global credit ratings agency affirmed the country's long-term foreign-currency issuer default rating at 'B-' with a stable outlook, averting a downgrade that top National Treasury officials had warned could "torpedo" the economy.

A credit rating or outlook is significant because it can sharply influence a country’s cost of borrowing in international financial markets, potentially triggering a vicious cycle of higher debt servicing costs and deeper fiscal strain. 

The affirmation comes as a relief to President William Ruto's administration, which is navigating high debt repayments and fiscal pressures ahead of the 2027 General Election. It follows proactive liability management operations by the government, including early buybacks of looming Eurobond maturities, which Fitch said had helped reduce near-term external liquidity risk.

Just days before the rating decision, the National Treasury had underscored the severe consequences of a negative rating from global agencies.

In its Medium-Term Debt Management Strategy (MTDS) for 2026/27-2028/29, published recently, the Treasury listed the "risk of credit rating downgrades" as a key threat to its fiscal plans, warning it "could increase borrowing costs and limit access to external financing."

The focus now shifts to other key global rating agencies including Moody’s and S&P Global Ratings, whose upcoming assessments will be closely watched by investors and the National Treasury. 

Kenya’s Medium-Term Debt Strategy for 2026-2029 warned that a credit rating downgrade from any of the agencies could "increase borrowing costs and limit access to external financing," making the decisions of the remaining major agencies critical for the country’s planned external borrowing mix and the cost of servicing the Sh12 trillion fast growing public debt stock.

Fitch's decision acknowledges the government's recent efforts to stabilise its finances. "External liquidity pressures have moderated, reflecting the government's proactive liability management and the build-up of FX reserves," the agency noted.

It highlighted the refinancing of a $1 billion (Sh129 billion) 2028 Eurobond in October 2025 and a partial buyback of the $900 million 2027 bond earlier that February.

Kenya's public and publicly guaranteed debt stood at a towering 67.8 per cent of GDP by end-June 2025, with the present value of debt expected to remain above the country's 55 per cent benchmark until 2029 according to Treasury.

The Treasury debt management plan described the public debt as "sustainable but with high risk of debt distress."

Fitch concurred on the persistent challenges, forecasting a fiscal deficit of 5.8 per cent of GDP for the 2025-26 financial year, well above the government's 4.7 per cent target.

"Fitch expects fiscal consolidation efforts to be hampered by rising spending commitments, especially interest payments, drought-related expenses, and higher social and security-related expenses ahead of the 2027 elections," the agency stated.

The rating affirmation aligns with the Treasury's chosen strategy outlined in the MTDS, dubbed 'Strategy S2'. 

This plan aims to reduce reliance on foreign currency debt, gradually shift from short-term Treasury bills to longer-term domestic bonds, and prioritize concessional external borrowing. The goal is to cut the share of foreign-exchange-denominated debt from 47 per cent to 40 per cent of the portfolio by 2029.

However, both Fitch and the Treasury strategy signal tough times ahead. Fitch expects Kenya's interest payment-to-revenue ratio to remain above 30 per cent roughly double the median for 'B'-rated peers, due to continued reliance on domestic and commercial borrowing.

The Treasury also warned of risks from "depreciation of the Kenya shilling," which could "raise debt service costs" and heighten fiscal pressures.

The stable outlook indicates Fitch does not anticipate a change in the rating over the near term, but it sets clear conditions for a future downgrade. These include greater external financing strains, a sharp decline in reserves, a sustained increase in debt costs, or a significant escalation in domestic social and political instability.

For the Ruto administration, the affirmation provides temporary breathing room to execute its debt strategy. Yet, as both the Treasury's warnings and Fitch's analysis make clear, analysts say maintaining market confidence will require strict adherence to fiscal consolidation and a delicate balancing act of the politically charged spending pressures of the coming election cycle.