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Expropriation Risk: 40 38 40 40 Political Violence Risk: 53 54 55 53 Terrorism Risk: 62 65 66 64 Exchange Transfer and Trade Sanction Risk: 44 44 44 43 Sovereign Default Risk: 57 56 58 58
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Although the political system has remained stable following last year’s ‘handshake’ agreement between President Uhuru Kenyatta and opposition leader Raila Odinga, the competition to succeed Kenyatta as president in 2022 threatens to split the government. The ruling Jubilee Alliance is divided into two factions. One is aligned with Kenyatta and wants him replaced by another leader from the Kikuyu ethnic group, or at the very least a leader with strong ties to that community. The other is led by Deputy President William Ruto and insists that Kenyatta must follow through with his promise to support Ruto’s candidacy. Infighting has already undermined progress on key infrastructure projects and is intensifying corruption as both sides look to build their financial resources ahead of what is sure to be an expensive campaign. As a result, anti-corruption efforts have become highly politicised, with each faction seeking to use corruption accusations to remove rivals. This had only involved fairly minor figures until July, when Henry Rotich, the finance minister and a key Ruto ally, was arrested in connection with the award of a contract worth 450 million dollars to an Italian company for the construction of two dams. Although the cost of the contract, which was 170 million dollars higher than the initial quote, appears to have been inflated to facilitate the payment of kickbacks, the arrest of such a senior figure is unprecedented. Rotich’s downfall has widely been interpreted as evidence that anti-Ruto forces within Jubilee plan to step up their efforts to neutralise his backers and cut off his access to funds. This increases the risk of a major schism and the collapse of the ruling party during the current parliamentary term. These political tensions have not yet had a significant impact on economic growth, however. In July, the governor of the central bank said that forecast growth would hit 6% in 2019, up from an earlier forecast of 5.3%, as a result of higher than expected agricultural output. However, hopes are receding that President Kenyatta’s Big Four agenda, which includes providing universal health coverage to all Kenyans, can be achieved by the end of his tenure in 2022. While the infrastructure provisions in the agenda are clearly needed, they are adding to the country’s debt burden.
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The government is aware that long-term economic growth is threatened by the decline in FDI, which fell by half between 2017 and 2018 to just 300 million dollars. Although it is keen to reverse this trend, a number of factors continue to concern investors. A report from the US State Department in July cited “endemic corruption” as one reason for the slowdown in foreign investment and singled out the process of acquiring land title as being particularly fraught. At the same time, investors are wary about the extent to which the 2022 election is already casting a shadow over the political landscape and threatens to impact policymaking, even though polling day is still three years away.
The prosecution of Henry Rotich has contributed to a growing sense within Ruto’s Kalenjin community that they are being marginalised within government. A formal split within the ruling party, especially one that would see Ruto take an active role in the opposition, has the potential to exacerbate ethnic fault-lines in the volatile Rift Valley region. This could potentially lead to localised conflict around such a split, and more destabilising violence in the run-up to the 2022 elections. Although more widespread unrest is unlikely until closer to 2022, unemployment and rising prices are increasing popular frustration with the government in many parts of the country. While Kenya’s official statistics suggest that the unemployment rate is just 7.4%, independent estimates put the figure closer to 30%.
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Following the January attack by al-Shabaab gunmen on the Dusit D2 hotel and office complex, in which more than 20 people died, the Kenyan government has asked the United Nations to include al-Shabaab on its list of terrorist organisations. The hope is to make it easier for Nairobi to leverage international support for its anti-terrorism efforts. The government has also moved to fill a gap in the country’s security infrastructure that was created by the devolution of power to the regions in recent years. There will now be new County Action Plans tailored to meet the threats posed to each region. While these efforts should help to reduce the risk of terrorist incidents in the longer term, sporadic attacks remain possible in the short term.
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As expected, the central bank left its benchmark interest rate unchanged at 9% in July, having cut it from 9.5% a year earlier. Inflation, which stood at a 19-month high of 6.6% in April, had fallen slightly to 6.3% by July. It remains below the central bank’s target of 7.5% in part because of government action to keep the price of staple goods in check, but the rising cost of living is a source of concern for both the government and the bank. There is also growing pressure on the government to impose trade restrictions in order to protect domestic agricultural producers, particularly rice farmers. While there is little evidence that the government is sympathetic to this request at present, the temptation to adopt a more populist policy will grow as the 2022 elections draw nearer.
The cost of debt continues to rise, generating concerns about the sustainability of the current economic model as external debt grows faster than domestic debt and puts pressure on foreign reserves. Kenya's debt profile is not yet dire, but debt-service-to-revenue ratios are persistently over the government's own 30% ceiling. The public-debt-to-GDP ratio currently stands at about 55% after Nairobi successfully applied for a 750-million-dollar loan facility from the World Bank in May while also issuing a 2.1-billion-dollar Eurobond. Kenya will need to keep borrowing to cover the persistent budget deficit, which has now reached 8%, and the expected rise in government expenditure ahead of the 2022 elections will only worsen this situation.
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