Previous Quarterly Editions
Expropriation Risk: 40 40 38 40 Political Violence Risk: 55 53 55 55 Terrorism Risk: 65 66 63 63 Exchange Transfer and Trade Sanction Risk: 44 43 43 45 Sovereign Default Risk: 58 58 60 62
TREND ▲ OUTLOOK ▲
In early April 2020, President Uhuru Kenyatta announced a three-week ban on travel into or out of the Nairobi metropolitan area, which accounted for more than 80% of Kenya’s cases of COVID-19 at the start of the month. One aim was to defer the imposition of a stringent lockdown within the capital for as long as possible. The move followed measures in late March 2020 that included plans to set up testing facilities in all 47 of the country’s counties, a dawn-to-dusk curfew and ten million USD for additional health workers to be deployed in urban areas. The government has also announced moves designed to stimulate the economy, including 100% tax relief for those with gross monthly income below the national average, a reduction of the highest rate of income tax from 30% to 25%, and a cut in VAT from 16% to 14%. The proposals were heavily criticised by opposition leaders, who pointed out that reducing the highest rate of income tax effectively rewards wealthy Kenyans who are reasonably well-placed to see out the crisis, while the VAT measures will be insufficient to save businesses that are forced to close as a result of the curfew. The government responded with a new support package of 375 million USD targeted at the country’s urban poor. As a result, it is already clear that the virus-related increase in government expenditure at a time of falling revenue, both from tax cuts and the collapse of demand in the tourism sector, will push the country further into debt. The IMF staff team that visited Nairobi for an Article IV consultation in the second half of February 2020, before the likely impact of the virus became clear, emphasised the need to reduce debt vulnerabilities now that nominal public debt is up to 62% of GDP. A meaningful reduction effort was already unlikely before the virus, however, given that the country’s politicians are already in campaign mode ahead of the 2022 general elections. This means an acceleration in public spending that will substantially undermine the government’s pledge to reduce the budget deficit from 7.7% of GDP in fiscal 2018-19 to below 4% by 2022-23. It also means that controversy over who should replace Kenyatta as the leader of the ruling Jubilee Alliance continues despite the virus crisis, raising political and ethnic tensions.
The increase in foreign direct investment (FDI) in 2019 will inevitably be reversed by the fall in investment that results from the virus-related suspension of projects and the inability of potential investors to come to the country to set up new ventures. Although Kenya is now seen as a more attractive destination for FDI than in recent years, having jumped 19 places in the 2018 World Bank Doing Business survey and a further five places last year, corruption remains high. Over the past three months, corruption allegations against a number of senior figures have further undermined confidence in President Kenyatta’s anti-graft policy. In particular, the resignation of the Managing Director of the Kenya Ports Authority, Daniel Manduku, who has been charged with unlawfully awarding tenders relating to the construction of storage facilities, has served as an important reminder of the hidden costs of importing and exporting into the country.
TREND ► OUTLOOK ▲
The durability of the “handshake” reached between President Uhuru Kenyatta and long-term opposition leader Raila Odinga in 2018 has underpinned a period of political stability. However, this is increasingly threatened by three developments. Most immediately, there is concern that the government response to the COVID-19 crisis will lead to claims that various groups and regions are being treated unfairly. Beyond this, the continuing controversy over Kenyatta’s Building Bridges Initiative, which will make changes to the country’s electoral system, is widening political divisions. Finally, the rift between President Kenyatta’s faction of the ruling party and that led by Deputy President William Ruto has widened. While this is unlikely to trigger political violence in the near term, the risk will increase in the medium term once the virus crisis finally eases.
Government initiatives to develop better integration between anti-terrorism efforts at the national and local level appear to be producing positive results. However, sporadic attacks remain possible in the short term, especially as the Kenyan government recently announced that its troops would remain in Somalia for the foreseeable future. According to media reports, al-Shabaab was linked to more than 15 small attacks in Kenya during the first quarter of 2020. Efforts to further contain the terrorist threat have been boosted by the announcement in February 2020 that Kenya has been chosen by the US as the partner for Washington’s first-ever overseas collaboration on a specific task force to fight terrorism. The Kenyan Joint Terrorism Task Force (JTTF-K) is designed to offer Kenyan security forces “training, experience and insight” from their US counterparts.
In response to the impact of coronavirus, the central bank has made funds available to banks to support borrowers who are struggling to repay their loans. It has also cut its main interest rate from 8.25% to 7.25%. However, this is still relatively high in Kenyan terms and is unlikely to produce a major expansion of lending, despite the fact that the banking sector is strengthening. Inflation ended 2019 at 5.3%, comfortably inside the central bank ceiling of 7.5%, but is already ticking up and may rise sharply if the virus crisis disrupts food distribution.
Although the government has repeated its commitment to reduce the budget deficit significantly over the next two years, the economic impact of the virus crisis will make what was already a difficult target essentially unattainable. It was already clear that government spending would increase as President Kenyatta attempts to complete his “Big Four” legacy projects and his party seeks to shore up public support ahead of the 2022 general elections. The government may be able to borrow more due to the greater availability of credit from the IMF and the World Bank during the COVID-19 crisis, using some of the money to improve public services in general, but this is only likely to make the situation worse in the long-run unless there is a corresponding programme of debt relief. The fall in the value of the shilling during the first quarter has pushed up the USD value of external debt, but foreign exchange reserves remained relatively high at more than 9 billion USD at the end of March 2020.
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