Kenya has received a boost from Moody’s Ratings, which upgraded the country’s sovereign credit rating from B3 to Caa1.

The move reflects a decline in near-term default risk, thanks to stronger foreign reserves and better access to international capital markets.

In its latest report, Moody’s highlighted improvements in Kenya’s external liquidity, a narrower current account deficit, and a more stable shilling.

These factors have eased pressure on the country’s balance of payments and given the government more flexibility to fund its operations.

“The upgrade to Caa1 reflects our view that Kenya’s risk of near-term default has declined, supported by stronger external liquidity and improved funding options,” Moody’s said.

Under Moody’s scale, Caa1 still signals high credit risk, meaning the country remains vulnerable to economic shocks and may face difficulty meeting debt obligations during stress periods. However, the upgrade from B3 indicates a reduction in default risk, even if Kenya remains far from investment-grade status.

The agency noted that Kenya’s return to international bond markets has helped smooth debt repayment schedules and lower refinancing pressures. By the end of 2025, foreign reserves had risen to Ksh1.57 trillion, or 5.3 months of import cover, up from Ksh1.2 trillion the previous year.

The current account deficit also shrank to 1.3 per cent of GDP in 2024, aided by stronger exports, higher diaspora remittances, and a growing services surplus.

Moody’s praised Kenya’s successful Ksh387 billion Eurobond issuance in 2025, part of which was used to buy back Ksh154.8 billion in bonds maturing between 2026 and 2028. This pushed the next major debt repayment to 2030, easing immediate pressure on government finances.

Despite the upgrade, Moody’s warned that Kenya still faces challenges. Debt affordability remains weak, interest costs are high, and progress on fiscal reforms is limited. Large fiscal deficits, projected near 6 per cent of GDP, make the country sensitive to shifts in borrowing conditions, especially given its heavy reliance on domestic debt.

The rating agency revised its outlook to stable from positive, signalling that recent gains in external liquidity and funding flexibility are expected to continue, even as structural fiscal challenges persist.