JH Explorer in Kenya: Into a lighter patch of trees, not out of the forest

“Kenya’s macro story feels like stepping into a lighter patch of trees: more light, better visibility — but still deep inside the forest.”

On the surface, the picture has improved meaningfully: the balance of payments has adjusted, FX buffers are firmer, and debt rollover risks have eased. Beneath the surface, however, fiscal dynamics remain the binding constraint, with deficits, debt servicing, and revenue mobilisation continuing to weigh on policy flexibility.

On the surface of the canopy: External resilience

Having just returned from Nairobi, the most striking change since our 2023 trip is how markedly Kenya’s external situation has improved. Back then the country had to deal with a high external debt service (including a massive US$2 billion Eurobond amortisation) amid persistent current account deficits, dwindling FX reserves and uncertain market access.

^{Traffic in Nairobi, Janus Henderson}

This time around Kenya met investors with a brighter landscape – one where its strong external buffers, stable macroeconomic conditions and more manageable external debt allowed it to return to international capital markets and receive credit rating upgrades.¹ FX reserves rose to US$12.5 billion (from around US$7 billion as early as mid-2024) on the back of strong exports, remittances and tourism. This was also a deliberate policy of the Central Bank of Kenya (CBK) to build buffers during the ‘good times’ in preparation for any potential external or domestic shocks.

Central Bank of Kenya usable foreign exchange reserves

^{Source: Janus Henderson Investors and Macrobond, as at 20 February 2026. Months of import cover, based on 36 months average of imports of goods & non-factor services. Non-factor services are invisible, intangible trade items (excluding investment income and labour compensation) such as transportation, tourism, insurance, and banking, which are not directly attributable to primary factors of production.}

On the liability side, last year the government conducted a series of successful liability management operations that moderated its near-term external liquidity pressures. It did so by issuing a series of Eurobonds to repurchase significant amounts of its outstanding 2027 and 2028 debt maturities, using the same template as in early 2024. The terms of its Standard Gauge Railway² loan with China Exim Bank were also renegotiated by converting US$3.5 billion in Renminbi, extending the maturities to 2040 and lowering the coupons, saving over US$215 million (0.1% of GDP) in annual interest payments.³

Beneath the trees: fiscal constraints

^{Nairobi city skyline, Janus Henderson}

While the external story is improving, the fiscal story remains stubbornly unchanged. Our discussions with policymakers, multilaterals, local banks and other relevant stakeholders revealed a consistent message: Kenya has plenty of options, but it lacks a credible fiscal story.

This was the core reason why the country’s previous IMF programme went astray last year after the government missed several key fiscal and structural reform benchmarks, resulting in over US$850 million being withheld by the IMF. Despite the National Treasury’s indication that negotiations toward a new arrangement will resume, our trip suggested limited prospects for success, as meaningful gaps persist between the two sides that obstruct the path forward, despite a mutual willingness to engage.

Unfortunately, Kenya’s fiscal slippages have become the norm. While for the 2025 fiscal year⁴ the deficit turned out worse than initially projected, for the current fiscal year (2026), the most recent estimate of the deficit is 6% of GDP, a significant miss relative to the original 4.7% of GDP target. Recent social unrest⁵ has reminded policymakers just how narrow Kenya’s political room for manoeuvre on taxation really is, leaving spending cuts as the blunt instrument of choice to rein in deficits. With interest payments consuming about a third of government revenues (as shown by the interest to revenue ratio), fiscal rigidity all but guarantees that development and social spending would take the hit – an outcome that may balance the books today but undermines the case for a durable fiscal consolidation tomorrow.

Debt interest-to-revenue ratio

^{Source: Janus Henderson Investors, Macrobond, as at 20 February 2026. There is no guarantee that past trends will continue, or forecasts will be realised.}

Temporary shelters for the rainy season

In the face of these constraints, policymakers had to come up with innovative solutions that raised concerns of their own. They increased the use of securitisations⁶ and Public Private Partnership‑like structures to fund infrastructure and other projects. While politically attractive, these instruments blur the line between on‑ and off‑balance‑sheet liabilities. Both the IMF and World Bank are clear that in their view these are still in effect public debt — and that their expansion weakens fiscal transparency and complicates programme design.

Privatisation has provided the government with another way to plug funding gaps, but the harder question is no longer whether to sell, but what to do with the cash once it arrives. Offloading profitable, dividend‑paying assets such as partly state-owned Safaricom and the Kenya Pipeline Company only makes sense if the proceeds are invested at a higher return or used to retire expensive debt and not used to finance current expenditure.

Meaningful fiscal consolidation requires something Kenya currently lacks: the trust of its citizens. Across our meetings, the same message surfaced repeatedly and clearly – that the social contract is broken, and that corruption and elite capture⁷ carry tangible economic costs, from weak tax compliance to subdued foreign direct investment (FDI) inflows. Without progress on restoring trust, any serious attempt at austerity risks triggering renewed unrest, leaving the government caught between fiscal imperatives and social limits, a dilemma exacerbated by the proximity of general elections August next year.

Narrow paths and fallen branches: funding frictions

In principle, Kenya retains access to a range of external financing sources beyond the IMF and international capital markets. The authorities continue to highlight strong relationships with multilaterals such as the World Bank and the African Development Bank Group, as well as with key bilateral partners including the US, China and the United Arab Emirates. That said, while such support tended to materialise in the past, this time we encountered growing scepticism around the execution of recent financing initiatives, exemplified by the US$750 million⁸ World Bank DPO (Development Policy Operation), which remains stalled due to unmet prior actions and questions over the country’s overall macroeconomic adequacy in the absence of an IMF programme. The delay in securing the DPO also casts a shadow over Kenya’s proposed US$500m Sustainability-Linked Bond, which was intended to garner support from other institutional donors. On a more constructive note, authorities expect the US$1 billion debt-for-food swap⁹ to be executed by June, and an additional US$1 billion remains available from the US$1.5 billion UAE facility agreed last year.

^{Kenyatta International Convention Centre (KICC), Janus Henderson}

Fortunately, Kenya’s deep local market remains one of its key credit strengths. Banks, pension funds, insurers, and asset managers provide a stable bid for government securities, insulating the sovereign from the volatility that afflicts more externally dependent African peers. Domestic institutions also hold a significant share of Kenya’s Eurobond stock, underscoring the depth of local savings. However, this strength comes with trade‑offs. Heavy reliance on domestic borrowing raises debt‑service costs and risks crowding out private‑sector credit over time. Banks are increasingly skewed toward short‑dated instruments, reflecting both liquidity preferences and uncertainty around fiscal policy. While this mitigates duration risk for the financial system, it leaves the sovereign exposed to rollover risk if deficits remain elevated.

Lighter, but still in the forest

^{Nairobi’s skyline, Janus Henderson}

Kenya’s recent economic progress is real — but it is also easy to misread. Falling inflation, a stable growth pattern, and rising external buffers have brought more light and clearer visibility, and in the short term that has delivered tangible results. But the terrain beyond that light has not fundamentally changed. Beneath the surface, long‑standing fiscal constraints and political incentives continue to pull the economy back toward familiar fault lines.

The risk for investors is not that Kenya is sliding backward, but that recent successes are mistaken for having cleared the forest rather than merely reached a lighter patch of trees. For investors, this argues for a disciplined, fundamentally‑aware approach: recognising Kenya’s strengths relative to EM peers, while remaining cautious about extrapolating short‑term gains into a durable fiscal turnaround.

¹Moody’s was the latest CRA (credit rating agency) to upgrade Kenya from CCC+ to B- right on the day of our trip to Nairobi. This followed the S&P upgrade (from B- to B) in August 2025/

²The Standard Gauge Railway is Kenya’s single largest infrastructure programme. Once completed it will link the country’s port of Mombasa to neighbouring landlocked Uganda. The first section (Mombasa-Nairobi) was opened in 2017 with financing from China Exim Bank and built by China Road and Bridge Corporation, and a subsequent second section (Nairobi-Naivasha) was opened in 2019. Since then, Kenya has explored various financing options for the remaining section to the Ugandan border town of Malaba, including the latest proposal of securitising 90% of the annual Railway Development Levy.

³Bloomberg, ‘Kenya snags $215 million saving after Chinese loan currency swap’, 07 October 2025.

⁴The fiscal year in Kenya runs from 1^st July to 30^th June.

⁵2024 saw nationwide protests against the 2024 Finance Bill, which escalated into the storming of parliament and a violent security response that left at least several dozen people dead and hundreds injured, ultimately forcing the government to withdraw the bill. Next year saw renewed protests driven primarily by concerns over governance and cost‑of‑living pressures.

⁶One example is the Talanta Sports City stadium, funded via a US$345m infrastructure Asset-backed Securities (ABS) listed on the local market in July 2025. The ABS is secured by future inflows derived from betting and gaming taxes. The government recently announced plans to securitise 90% of the Railway Levy to fund the extension of the SGR from Naivasha to Kisumu.

⁷Elite capture is a term used in economics, development, and governance to describe a situation where a small, powerful group (‘elites’) disproportionately influence or control public resources, policies, or institutions for their own benefit, rather than for the broader population.

⁸World Bank, ‘Infrastructure Modernization for South Africa Development Policy Loan’, 9 June 2025.

⁹Kenya and the U.S. International Development Finance Corporation have agreed to a US$1 billion debt-for-food swap, during Kenyan President William Ruto’s visit to Washington in December 2025. This would allow Kenya to replace costly existing debt with lower-cost financing on condition it channelled the savings towards programmes to boost food security.

IMPORTANT INFORMATION

Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.

Sovereign: Typically refers to debt issued by a national government. Sovereign bonds are backed by the country’s creditworthiness and ability to repay.

Sovereign debt securities are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.

Securitized products, such as mortgage-backed securities and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.