Kenya faces sobering debt crisis reality after Eurobond high

The John Mbadi-led National Treasury’s strategy to navigate the country’s severe debt crisis is facing a critical examination from international markets and economists.

They point to rising external financing risks and a lack of clarity on future funding, even after the critically acclaimed successful repayment of the $2 billion (Sh260 billion) Eurobond.

While that operation bought the government precious time and provided a crucial confidence boost, it did not resolve the nation’s fundamental fiscal challenges.

The government’s current plan, heavily reliant on a complex web of debt-swap operations and an anticipated $750 million (Sh98 billion) World Bank loan, is viewed by analysts as fraught with execution risks that could exacerbate the very pressures it aims to alleviate.

These concerns are amplified by a growing chorus of caution from global ratings agencies and domestic oversight bodies that collectively warn that Kenya's path to fiscal sustainability is narrowing.

The core of Kenya's economic vulnerability is its staggering debt burden, which reached a record Sh11.73 trillion by June.

This alarming figure is at the heart of the warnings from international lenders. Fitch Ratings, in a recent report, underscored the fragility of the government’s approach, questioning the feasibility of key initiatives led by Treasury Cabinet Secretary Mbadi.

These include a proposed $1 billion (Sh130 billion) debt-for-food swap with the World Food Programme and a complex conversion of Chinese debt into renminbi (RMB).

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

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

The agency explicitly warned that it “remains unclear whether Chinese authorities will support the proposal,” which could affect up to 20 per cent of Kenya’s annual debt payments.

The situation is compounded by a lack of clarity regarding the government's relationship with the International Monetary Fund (IMF), a traditional anchor for investor confidence.

With no official word on the progress of talks for a new financing package, the government's external financing landscape is becoming tougher to navigate.

These plans come as the government contends with a series of large foreign-currency maturities, including a $300 million (Sh39.2 billion) syndicated loan due in December 2026 and another major Eurobond maturing in 2028.

The government’s approach to these has also been scrutinised.

The "growing chorus of debt risks" is not merely a theoretical concern for economists and ratings agencies; its consequences are already being felt across the Kenyan economy, affecting everything from infrastructure to household finances.

The most direct consequence of the debt crisis is its effect on the government’s ability to fund development.

The massive debt service burden, which consumed Sh1.59 trillion last financial year, severely limits the government’s fiscal headroom.

This staggering figure is equivalent to approximately 91 per cent of the budget allocated for public debt, leaving little room for new capital projects.

Furthermore, the promised alternative for infrastructure funding—Public-Private Partnerships (PPPs)—has seen few major projects break ground, according to a review by The Standard on Sunday.

Analysts say investor caution and implementation challenges have slowed the initiative, leaving a significant funding gap for development.

Consequently, critical infrastructure projects are delayed or shelved, stalling progress on the government's "Bottom-Up Economic Transformation Agenda" and directly impacting ordinary citizens through underfunded services and delayed infrastructure.

The government’s extensive borrowing from the domestic market is having a direct and negative impact on local lending.

Controller of Budget Margaret Nyakang’o recently revealed that domestic debt now makes up 54 per cent of the total, breaching the government's own target of a 50:50 split.

This reliance on the local market has a ripple effect.

To attract investors, the Central Bank of Kenya (CBK) must offer high interest rates on its domestic bonds.

This makes borrowing in the local market more expensive for everyone else.

Commercial banks, finding a safer and more lucrative option in lending to the government, have less incentive to lend to individuals or businesses.

This phenomenon, known as "crowding out," makes capital prohibitively expensive for private businesses and individuals.

A young entrepreneur seeking a loan to start a business or a family looking to finance a mortgage finds themselves facing high interest rates, if a loan is available at all.

This stifles private investment, job creation, and overall economic growth.

The mixed signals from international ratings agencies create a complex environment for investors.

While S&P’s recent credit upgrade to "B" from "B-" provided a crucial vote of confidence and may lead to reduced borrowing costs on future sovereign bonds, the warnings from Fitch and Moody’s create lingering uncertainty.

Investors, both foreign and domestic, will remain cautious.

Analysts say the conflicting assessments mean that while the risk of immediate default may have receded, the underlying structural problems remain.

As a result, assessments show investors will still demand a higher premium to hold Kenyan risk, making commercial borrowing more expensive.

At the same time, the government's aggressive approach to revenue collection, including the crackdown on digital taxi drivers, has raised eyebrows.

Some analysts have said it may deter investors and create an unpredictable environment for domestic businesses.

Tax policy experts have in the past voiced concerns that such measures could backfire, with tax consultant Ian Njoroge warning that “every new tax measure pushes more transactions underground.”

This creates a climate of uncertainty that can discourage long-term investment.

The successful execution of the Treasury’s plans is explicitly tied to the timely disbursement of the $750 million World Bank DPO.

Fitch analysts emphasised that this funding is not guaranteed, as it is contingent on the implementation of several reforms, including measures to strengthen expenditure controls, which "may be tough."

Failure to secure this funding, experts warn, would force the government to seek more expensive commercial borrowing, increasing the debt burden.

The situation highlights a fundamental contradiction in the Ruto government's economic model. While aggressively pursuing new taxes, the government has been hesitant to implement deep spending cuts, a move that would be politically unpopular.

With the World Bank loan conditional on reforms and the path forward with the IMF unclear, economists say the Treasury’s room for manoeuvre is narrowing.

The coming months are seen as a critical test of its ability to secure concessional funding and execute complex financial operations to avert a renewed crisis when the next major Eurobond matures in 2028.