21-07-2025
Kenya faces surge in interest rates as global tariff wars threaten investment
Kenya is facing fresh fears of high interest rates and a risk of slowing down investments and private sector businesses, even as the country's central bank sustained cuts to boost consumer spending.
The latest fears are as a result of global trade policy uncertainties sparked by escalating US-led tariffs wars, which are weighing heavily on world financial and credit markets.
Economists and global rating agencies say tightening credit conditions in the world financial markets will affect foreign inflows and the flow of credit to emerging and frontier markets such as Kenya. And this will leave the National Treasury with limited options including turning to local banks and pension funds for money through treasury bill and bonds and a rise in interest rates.'Significant and wide-ranging increase in US tariffs would affect sovereign credit conditions by disrupting trade flows, directly and indirectly hurting GDP growth, weakening fiscal and external balances and tightening financing condition,' says Moody's Investor Service in a brief this week.'No wide-ranging tightening of financing conditions yet, but liquidity risks remain high for frontier markets with limited buffers.'
'For sure, the environment is challenging and has been amplified by global uncertainties and the confidence shock that has percolated to markets so far from the last quarter,' says Churchill Ogutu, an economist at IC Asset managers.'Generally, these conditions have disincentivised tapping the dollar international markets. Furthermore, the dollar weakness is also giving positive offset to any potential issuer. Given the uncertainty of financing flow, timings of external issuance, the government will have to rely on domestic borrowing as was the case in the just ended fiscal year.'Economists at the London Stock Exchange (LSE) listed Standard Chartered Group Plc say high US rates and a stronger US dollar will make it harder for emerging market issuers to borrow in international capital markets.'Expectations of a shallower rate cutting cycle from the Fed is likely to translate into a stronger USD and a steeper US yield curve,' they say.'Higher US rates and a stronger USD will make it harder for emerging market issuers to borrow in international capital markets, and could significantly reduce portfolio flows to emerging markets. In addition, emerging market central banks may be constrained from cutting rates meaningfully.'Trump has pledged to use import tariffs to reduce US trade deficit and bring production back to the US.
While this process has begun, uncertainty around the scope and extent of tariff action from the US and likely retaliation by trade partners might act as drags on consumer and investor confidence, slowing growth.
The expectations of spending on defence and infrastructure together with possible tax cuts are likely to be inflationary and could see the Fed terminal rate settling at a higher level than in the pre-pandemic period.'This would significantly change the global funding environment for emerging markets. The external funding environment for emerging markets will likely be tougher as US Money Market rates could stay elevated with a higher Fed terminal rate,' the economists at Standard Chartered Group Plc say.'Emerging market economies that are more domestically driven and have better fiscal and monetary buffers to offset external shocks are likely to be more resilient to external shocks.'Economists at the African Export-Import bank (Afreximbank), say the political turn towards tariffs and subsidies in 2025 has spilled over into finance and heightened trade protectionism shaping the global economic landscape and sparking widespread risk aversion in global financial markets.'As investors reassess the United States' economy's outlook and the role of the US dollar as a stable medium of exchange and a stable store of value, a weaker US dollar and higher interest rates could tighten global liquidity, raising funding costs for countries – many of them in Africa – with large development finance gaps, twin deficits, and scant reserves,' says Afreximbank.'Risk-averse banks could pull back trade credit precisely when exporters need it most, amid negative financial sentiment, and precipitate a global recession, while foreign direct investors could demand higher returns before committing capital in African markets, perceived as riskier.'
Kenya will be looking to borrow Ksh287.7 billion ($2.23 billion) from foreign lenders this financial year (2025/2026) to support its Ksh4.29 trillion ($33.25 billion) spending plan which has a hole of Ksh923.2 billion ($7.15 billion).
National treasury has set out to borrow Ksh635. 5 billion ($4.92 billion) from the domestic market in the current financial year but this could go up going by the unfolding conditions in the global credit markets.'We borrow externally because it is cheaper. But the cost goes beyond interest rates, there are other conditions as IMF has shown. We should seek cheaper funds with few conditionality. That is why the government loves borrowing locally, it's straight forward, the only cost is interest rates,' says Prof XN Iraki of the University of Nairobi's Faculty of Business and Management Sciences.'To mitigate crowding out effect, we should try other bonds, beyond Eurobonds and be good negotiators. We should look at each type of the bond and do a cost benefit analysis to pick the best bond. With the conditionality, and tightening global financial conditions (including Europe borrowing to boost defense), we should learn to live within our means and reduce corruption and waste.'Overall CBK has lowered benchmark lending rate by 3.25 percentage points to 9.75 percent in June 2025 from 3 percent in August 2024 and with the with the easing of monetary policy stance, interest rates in Kenya have been declining.
For instance, the rates on the 91-day Treasury bills declined from an average of 15.9 percent in May 2024 to 8.3 percent by May 2025 while the average commercial bank lending rates that peaked at 17.2 percent in November 2024 declined to 15.7 percent in April 2025.
The bulk of these funds amounting to Ksh851.42 billion ($6.6 billion) will go towards servicing domestic while Ksh246.26 billion ($1.9 billion) will be paid to foreign lenders. 'Kenya's financial position is at an inflexion point. Hence, Trump's policies are likely to make the situation worse,' says Prof Samuel Nyandemo of the University of Nairobi's School of Economics.'Consequently more borrowing, particularly from the domestic market whose aftermath shall be crowding out private investors and reduced government expenditure. Ultimately, this shall shrink the economy, hence reducing economic growth.'
