Previous Quarterly Editions
Expropriation Risk: 40 38 40 42 Political Violence Risk: 53 55 55 55 Terrorism Risk: 66 63 63 60 Exchange Transfer and Trade Sanction Risk: 43 43 45 43 Sovereign Default Risk: 58 60 62 64
TREND ► OUTLOOK ▲
The battle to be the favoured candidate to replace President Uhuru Kenyatta, when he steps down in 2022, already dominates the political landscape as the rift between Kenyatta and his Deputy, William Ruto, continues to deepen. Following a series of minor incidents, the deteriorating relationship came to the fore in June 2020 when the president engineered the dismissal of Aden Duale, a well-known Ruto ally, from his position as the Majority Leader in the National Assembly. The move came after 130 MPs signed a petition saying that he was sabotaging the Jubilee Party’s agenda. Duale’s replacement, Amos Kimunya, comes from the same Kikuyu ethnic group as Kenyatta which is believed to be a close ally. In addition to being a major blow to the Ruto camp, the episode illustrates the way in which factional politics have undermined the president’s campaign against graft because Kimunya’s previous high-profile career- as a cabinet minister- ended when he was forced to resign following a corruption scandal. Duale’s sacking significantly increases the risk that Deputy President Ruto will leave the government ahead of the 2022 elections, which in turn could trigger renewed ethnic clashes between his supporters from the Kalenjin ethnic group and members of the Kikuyu community. Despite an early economic support package worth 375 million USD (which includes 100% tax relief for low-income workers and a small cut in VAT), the IMF now expects that Kenya’s economy will contract this year for the first time since 1993. More than a million Kenyans have lost their jobs since the pandemic started, many in the tourism sector that accounts for 10% of GDP. Nairobi and the coastal areas of Mombasa, Kilifi and Kwale, all major tourist destinations, have been particularly affected by the crisis. Food availability has recently become another government concern as swarms of desert locusts are reducing agricultural production in parts of Somalia, Ethiopia, and Uganda as well as Kenya. The FAO is now warning of an “unprecedented threat to food security” in East Africa. However, May 2020 brought some respite as the export of black tea increased by 15% compared to April 2020. The export of flowers also grew by 23% to approach pre-COVID levels. Travel-related restrictions were lifted in early July 2020 in an attempt to revive the tourist sector, and the government has not re-imposed them despite a subsequent surge in cases. The official number of COVID-19 infections continued to rise to beyond 13,000 by mid-July 2020, although this is widely accepted to be significantly underestimated as less than 100,000 people have been tested. Health experts have warned that it would be a major risk to re-open the country while the number of cases is still increasing.
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Kenya has experienced an increase in foreign direct investment (FDI) in recent years, which is largely part due to its efforts to reduce the cost of doing business. However, FDI is expected to fall by 40% or more this year due to the economic slowdown triggered by the pandemic. Concern about high levels of corruption continues to be a barrier to investor confidence, especially in light of the return of Amos Kimunya to national prominence as Majority Leader. Kimunya had previously been forced to resign as Finance Minister following a scandal in which a hotel in Nairobi was sold by the central bank for less than half its value to a group of Libyan businessmen.
The durability of the “handshake” agreement, reached between President Kenyatta and long-term opposition leader Raila Odinga in 2018, has underpinned a period of political stability between the country’s long-term opposition leaders and the ruling party. However, Odinga’s inclusion in the government appears to have strengthened President Kenyatta’s hand, enabling him to marginalise Deputy President William Ruto. In turn, this increases the risk of a fresh outbreak of conflict between the Kikuyu and Kalenjin ethnic groups, which were involved in some of the worst clashes following the disputed elections of 2007-8. Accusations that Ruto’s Kalenjin community are being unfairly treated by Kenyatta will exacerbate criticism that the government has not done enough to protect ordinary Kenyans from the economic implications of COVID-19. Against this backdrop, the controversial Building Bridges Initiative, which will make changes to the country’s electoral system, has the potential to trigger political unrest, especially as many Ruto supporters see it as an elaborate plot to permanently exclude him from power.
TREND ▼ OUTLOOK ►
The curfew, and other COVID-19-related restrictions implemented by the government, has significantly increased the presence of the security forces in urban areas, and this has made it more difficult for terrorist groups to operate. However, al-Shabaab attacks continue in remote areas, and in mid-June 2020 a police reservist was killed in Mandera, a border town in the northeast of the country. There is also concern that al-Shabaab, which appears to have stepped up its campaign in the counties that border Somalia, will benefit from the economic downturn, which may make it easier to secure new recruits. Kenyan efforts to contain terrorism have been boosted by the formation of the Kenyan Joint Terrorism Task Force (JTTF-K) with the United States, although the full implementation of this programme has been disrupted by the travel restrictions imposed during the COVID-19 pandemic.
In response to the impact of COVID-19, the central bank made cuts to bring its benchmark interest rate down to 7% by the end of April 2020. It held that rate in June 2020 on the basis that its economic measures were having the desired effect. The economy has been boosted by the recovery of diaspora remittances by 20% between April and May 2020, while inflation fell slightly to 5.5% and remains comfortably inside the broad target band of 2.5%-7.5%. The cut in VAT should help to keep inflation low, although food shortages could lead to an increase in the cost of staples later in the year (2020).
TREND ▲ OUTLOOK ▲
The government still hopes to reduce the budget deficit significantly over the next two years but the economic impact of COVID-19 is making an already difficult target essentially unattainable. The situation has been exacerbated by the government’s rejection of the G20-led debt suspension initiative after the finance ministry refused to countenance restrictions on Kenya’s access to international capital markets as part of the deal. As a result, the country has become increasingly indebted during the COVID-19 pandemic, having secured loans of 740 million USD from the IMF, one billion USD from the World Bank, and 250 million USD from the African Development Bank, all to support its COVID-19 response. This will push the debt-to-GDP ratio close to 65% by the end of 2020.
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