Kenya: Fiscal slippage validates our eurobond caution

• Kenya's fiscal deficit for FY 2025/26 now projected at 6% of GDP, up from 4.7% in approved estimates

• Domestic borrowing target widened by KES104bn for FY 2026/27 as pre-election spending pressures mount

• IMF programme discussions could resume in February

  
  

The Kenyan government's Budget Policy Statement (BPS) 2026 tabled in Parliament yesterday (12 February) shows the budget deficit is now projected at 6% of GDP for FY 2025/26, a significant miss versus the 4.7% originally approved. The government has also increased its FY 2026/27 fiscal deficit target by KES104bn to KES1.170tn (US$9.1bn at current rates). The KENINT '34s slipped 0.4% yesterday following the news (spreads +16bps), leaving them flat in price terms so far this year (-0.02% ytd) after December's 5.1% rally.

The slippage is worse than even the IMF's revised forecast. The Fund had already widened its FY 2026 fiscal deficit projection from -5.0% to -5.6% in the October WEO; yesterday's 6% figure undershoots that by another 40bps.

The Treasury plans to finance the FY 2025/26 gap through KES254.8bn of net foreign loans and KES885.9bn of net local borrowing. For FY 2026/27, net domestic financing of KES890.4bn dwarfs net external borrowing of KES225.5bn. The BPS also flags KES155.3bn in pending bills recommended for settlement, with KES80.3bn in roads claims earmarked for securitisation. The government is also exploring alternative financing instruments including sustainability-linked bonds, diaspora bonds, Samurai bonds and Panda bonds.