Disruption in the Strait of Hormuz has increased the cost and risk of transporting fuel, petrochemicals and other Gulf-linked cargo. What is critical for leadership teams, lenders and policymakers to acknowledge is that energy price shocks do not create weaknesses in balance sheets. They expose existing ones. Writes Henok Eyob, PhD, Managing Director and Partner at Boston Consulting Group (BCG), Nairobi.
For Kenyan executives, the Strait of Hormuz will fast become a balance sheet story.
With vessels anchored in Gulf waters, major carriers are suspending transits and war-risk premiums are surging several-fold. This is now a stress test of three foundations of the economy: imported energy, foreign capital access and open trade routes.
From FMCG distributors in Nairobi to manufacturers along Mombasa Road, the exposure will show up in margins, working capital and foreign-exchange requirements.
What is critical for leadership teams, lenders and policymakers to acknowledge is that energy price shocks do not create weaknesses in balance sheets. They expose existing ones.
Kenya remains a significant net importer of petroleum products. Every sustained $10 USD (KES ~1,295) increase in global oil prices translates directly into a higher national fuel import bill. The impact travels quickly through the economy: logistics costs rise, manufacturing input costs increase, transport prices move higher and foreign-exchange demand intensifies.
If oil prices move back into the $100–120 USD (KSh ~12,955 – 15,546) range last seen in 2022, Kenya could experience a material supply-side shock. The government-to-government fuel import arrangement provides partial buffering by allowing domestic sales to be collected in shillings and converted into dollars gradually. This smooths foreign-exchange demand but does not reduce exposure to global oil prices.
Those discovering the exposure for the first time in a live crisis may find the adjustment considerably more expensive.
The more significant macro risk lies in the interaction between higher oil prices and a weaker shilling. A sustained oil shock raises Kenya’s dollar import bill directly and can also place pressure on the exchange rate. For companies with USD liabilities and KES revenues, this creates a dual exposure: import costs rise in dollar terms and the local-currency value of external debt rises simultaneously. For highly leveraged firms, that combination can compress covenant headroom quickly.
Kenya does have a structural advantage. Nearly 90% of electricity generation comes from renewable sources. Over the long-term, electrification of fleets, industrial heat processes and backup systems should increasingly be viewed as balance-sheet hedge against imported fuel volatility.
Kenya’s logistics exposure runs through two channels.
The first is the Gulf itself. Disruption in the Strait of Hormuz increases the cost and risk of transporting fuel, petrochemicals and other Gulf-linked cargo.
The second is the Red Sea and Suez system. Even when Kenyan cargo does not directly transit Suez, the global container network is affected when carriers suspend Gulf calls, reroute vessels, reduce capacity and absorb higher insurance costs.
For Kenyan importers, the result may not be a single freight shock. Instead, it manifests as a broader deterioration in reliability, shipping capacity, transit times and landed cost. War-risk insurance premiums for Gulf transits have risen from roughly 0.25% of hull value to more than 2.5% in some cases. On large vessels this translates into millions of dollars per voyage.
Where vessels reroute around the Cape of Good Hope, transit times may extend by up to 2 weeks. For a company generating KSh 10 billion in annual revenue, the working-capital impact of a 15-day delay can be substantial. If imported inputs represent roughly 40% of cost of goods, that delay can tie up approximately KSh 150–170 million in additional working capital.
The closest recent analogue to the current environment remains the 2022 commodity spike, when Brent traded consistently above US$ 100. That episode coincided with several additional pressures: a general election, severe drought, tightening monetary policy and the expiry of COVID-era loan restructurings.
Three broad patterns typically emerge.
- •Margin Pressure
Companies that purchase inputs in dollars - fuel, imported raw materials, freight - while selling their products primarily in shillings face a structural mismatch. Revenue remains anchored in local currency. Costs move with both the oil price and the exchange rate.
When both move unfavorably at the same time, pricing adjustments rarely occur quickly enough to protect margins. The result is a familiar financial pattern: revenues continue growing, but profits decline sharply as cost inflation outpaces pricing power.
Industries with the greatest exposure typically combine several characteristics: energy-intensive production or distribution, significant imported inputs priced in dollars, significant hard currency debt and domestic revenues denominated in shillings.
2. Transmission to the Banking System
The second transmission channel appears more slowly and tends to surface in bank balance sheets. When manufacturers, distributors and retailers experience margin compression, the pressure ultimately transfers to the financial institutions that have lent to those businesses.
Historically, this process unfolds over six to twelve months. Corporate borrowers first absorb shocks through internal liquidity buffers- only later do missed payments and restructuring requests begin to appear.
During commodity shocks, banks often experience two opposing effects simultaneously. First, short-term benefits deriving from increased trade finance demand, higher FX trading activity and stronger fee income. However, there is a delayed risk due to rising non-performing loans, higher credit provisions and deteriorating asset quality. This timing difference can temporarily produce strong banking profits even while credit stress is building beneath the surface.
3. Natural Hedges
Not all companies experience energy shocks negatively.
Export-oriented agricultural producers, tourism operators and firms generating regional or international revenues often benefit from the conversion of foreign earnings into a depreciating local currency.
The hedge is not perfect. Energy costs still rise domestically, and several agricultural inputs -particularly fertilizer - move within the same global commodity complex as oil. Fertilizer markets are closely linked to natural gas prices and global shipping costs. When energy markets tighten, fertilizer prices frequently follow.
For agribusiness, the risk often appears with a lag. Higher fertilizer prices during planting seasons can reduce application rates, leading months later to lower yields and higher food prices.
The Response Window Is Narrowing
For executives navigating the current environment, three priorities stand out.
Stabilize
The first step is visibility. Companies can institute a weekly cross-functional review involving finance, treasury, procurement, operations and commercial teams. They can establish a small response team to translate exposure in fuel, freight and foreign exchange directly into operational decisions on pricing, inventory and financing.
Every executive team should be able to answer several immediate questions:
- •What is our EBITDA sensitivity at $100, $110 and $120 oil?
- •What does 5–10% shilling depreciation do to our covenants?
- •How much liquidity does a 15–30-day transit delay absorb?
- •Without that visibility, most decisions become guesswork.
Protect
Once exposure is quantified, attention should shift to the balance sheet. CFOs should reassess unhedged USD liabilities, short-term refinancing requirements and covenant headroom under weaker currency scenarios.
Discussions with commercial banks should begin early. On working capital, companies should review inventory days against longer transit assumptions, supplier payment terms and using tools such as factoring and supply-chain finance to accelerate cash collection and support supplier.
Cost structures may also need recalibration. Some input cost increases will prove temporary; others may become structural.
Move
During cost shocks, the instinct is often to raise prices across the board. That approach is rarely optimal.
Cost pressures move unevenly through the economy. Executives need clarity on which products have genuine pricing power, which customer segments can absorb price increases and where protecting strategic relationships matters more than recovering margin immediately
Selective repricing often protects more margin than blunt adjustments.
With African economies maturing, there may also be regional considerations. Buyers in Uganda, Tanzania and Rwanda face similar disruptions. In the medium term, Kenyan manufacturers and agri-processors with available capacity may find openings to capture intra-EAC market share while global competitors struggle with longer supply chains.
At the same time, companies should plan for duration by stress-testing capital expenditure under tighter financing conditions, diversifying sourcing beyond single-country dependencies and reconsidering just-in-time assumptions for critical inputs
Crises like this rarely reveal new weaknesses; they expose existing ones. Companies that already understand their structural exposure to fuel, freight and currency, that have quantified their EBITDA, and that have the balance sheet headroom to absorb a prolonged shock, will navigate the turbulence.
