Previous Quarterly Editions
Expropriation Risk: 55 55 55 55 ►Political Violence Risk:51 51 51 51 ►Terrorism Risk:64 62 62 70 ►Exchange Transfer and Trade Sanction Risk: 63 64 64 63 ►Sovereign Default Risk:74 74 74 74 ►
TREND ►
Protest intensity to date* 2022 2023 Low MediumUnrest risk in 2024**Cost of living: HighAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
Kenya is a country in which the risk of debt default is growing, and government management of the debt has risen to the top of the political agenda. According to the International Monetary Fund, Kenya faces a high risk of debt distress.
These concerns are less driven by the actual debt level — which at a 68% public debt-to-GDP ratio is above the 60% threshold but below other African states around which there is less concern, such as Rwanda — and more by fears that a combination of rising yields, sluggish economic growth, corruption and mismanagement will leave the country unable to keep up its repayments. Already in April, the government failed to pay civil service salaries due to having insufficient cash flow; according to one government economic advisor, this move was necessary, as it was the only way that the government could afford to meet an upcoming payment.
The government’s commitment to avoiding a default is coming under greater pressure, however, due to the failure of President William Ruto’s administration to reduce the cost of living. Having won power last year on a campaign that promised to make life better for the country’s hard-working “hustlers,” Ruto has found it impossible to deliver on his campaign promises. According to an opinion poll conducted by the TIFA group in June 2023, more than half of Kenyans believe that the president has “achieved nothing.”
One reason for public hostility is high food and fuel prices, which are partly driven by external factors, such as the Russian war in Ukraine since February 2022, but also reflect an increase in government taxes. Tax on petroleum products doubled from 8% to 16% in the last budget, which made fuel in Kenya the 12th most expensive of all African countries. Another factor is that Ruto’s efforts to reduce the deficit have involved a raft of new taxes and tax increases in a number of other areas. A mandatory 1.5% housing levy has been introduced for both employees and employers, while tax on the total sales of small businesses has been increased from 1% to 3%.
These numbers may seem relatively small, but the cumulative effect of the changes that have occurred over the past 10 years has been to move Kenya from a relatively low tax environment toward becoming a high tax environment. It is now estimated that wealthier Kenyans earning above 800,000 Kenyan shillings (KES) (about US$5,500) will pay well over 40% of their income in taxes of one form or another. This has shone a spotlight on what Kenyans receive from the government in return, as the quality and quantity of public services comes under increasing pressure.
Even with these tax increases, however, Kenya is likely to remain vulnerable to debt distress, in part because the structure of the debt means that repayment costs are higher than for other states with a comparative debt level, with the country’s 10-year yield standing at 16.286%. In particular, US monetary tightening and the conflict in Ukraine has led to a spike in yields for the country’s six Eurobonds that are worth a total of US$7.1 billion. This has raised serious questions about the country’s capacity to manage a 10-year Eurobond worth US$2 billion that needs to be repaid in June 2024.
This represents the main crisis point on the horizon, as the next Eurobond redemptions are not due until 2027 – 2028, although as the example of the government’s failure to pay civil service salaries demonstrates, even smaller repayments and domestic debt deadlines have the potential to generate economic crises. Further delays in the payment of civil servants and other government employees such as teachers and nurses are therefore likely — thereby providing further fuel for opposition protests.
Having initially launched mass protests that were predominantly designed to contest his election defeat to Ruto, the main opposition leader Raila Odinga subsequently refocused his message to highlight the cost of living, which has achieved considerably more public resonance. In an attempt to demobilize the protests and foster a sense of political stability, Ruto offered to meet with Odinga in July 2023, and talks began in early August. At present, it is unclear whether Ruto will be willing to make sufficient concessions to placate Odinga or whether the process will fall apart, triggering a further round of destabilizing protests.
One key factor will be whether Odinga pushes for far-reaching economic and political reform — in line with his rhetoric — or is more focused on securing a government position or salary for himself. The evidence of the past two years suggests that Odinga may put his own interests ahead of those of his supporters. If so, the prospects of political unity and hence stability will improve, at least in the short term. While Ruto is unlikely to be willing to contemplate changes to the political system, and cannot afford to reverse the tax increases, he may well be willing to buy Odinga off, given the number of challenges his government now faces.
Attracting foreign direct investment continues to be a struggle: Such investment has declined as a percentage of GDP from 3.095% in 2011 to 0.347% in 2022. Indeed, the Kenyan Investment Authority (called KenInvest) had projected that there would be a significant uptick.
Concern about political violence — and the possible economic and political instability that could be associated with debt repayments or debt default — may also be undermining investor confidence, despite considerable interest in green energy, agriculture, oil and gas.
A series of large-scale protests at the beginning of the year threatened to escalate into broader conflict in March, when figures close to the government appeared to respond by attacking property belonging to former President Uhuru Kenyatta, who backed Odinga in the 2022 polls. Protests against the latest round of tax hikes in July further increased tension, as two rounds of demonstrations — and a heavy-handed response from the security forces — resulted in at least 15 deaths.
Whether the protests will continue depends on whether the ongoing talks between Ruto and Odinga end in an agreement between the country’s two main political coalitions or lead to fresh acrimony. If Odinga is co-opted into government, the challenge of managing public discontent will be significantly reduced; however, rising taxes, coupled with the government’s falling popularity, mean that spontaneous protests remain a significant risk, especially if living conditions worsen for the populace.
Terrorism attacks committed by the Al-Shabaab group increased significantly in June 2023, raising questions about the potential impact of the planned re-opening of the Kenya-Somalia border. The most common locations for attacks continue to be Garissa, Mandera and Lamu counties, which suffered around 30 fatalities, around half of which appear to have resulted from Al-Shabaab activity.
This represented a significant increase on the previous month, although the Kenyan coast has consistently suffered from Al-Shabaab activity, and this shows no signs of abating. A major attack on a high-profile destination such as the capital Nairobi therefore remains a risk, although Kenya’s security forces and information-gathering processes appear to have been significantly strengthened in recent years.
The central bank has continued to increase interest rates in a bid to restrain inflation. The interest rate was increased to 9.5% in March 2023 and then 10.5% in June. The rate has remained at this level since. Further increases may be needed, although inflation decreased from 7.3% in July to 6.7% in August, mainly due to a decline in the cost of food.
Kenya’s debt burden is estimated at US$33.58 billion, with debt repayments hitting 59% of the country’s tax revenue in the fiscal year to June 2023. This was the highest figure in over a decade and represented a 2% increase over the previous 12 months.
The risk of default is likely to reduce as tax income rises due to the new budget and the Ruto government has adopted a tighter monetary policy. However, Kenya has now breached the KES10 trillion borrowing limit that the National Assembly had set in June 2022, and Ruto is likely to come under increasing public pressure to avoid austerity politics and to spend more to offset the impact of high prices on Kenyan citizens.
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