Previous Quarterly Editions
Expropriation Risk: 51 51 51 52 Political Violence Risk: 51 51 51 51 Terrorism Risk: 63 63 60 60 Exchange Transfer and Trade Sanction Risk: 45 45 55 55 Sovereign Default Risk: 66 66 66 66
TREND ►
The political scene has been dominated by the efforts of President Uhuru Kenyatta and his allies to push through the reforms proposed under the Building Bridges Initiative (BBI). These include the creation of new posts, including prime minister, two deputy ministers, and the position of leader of the opposition. The size of the government would also be expanded in other ways, with the addition of a further 27 senators and ten members of parliament, to meet constitutional requirements relating to gender equity and people with disabilities. It is estimated that the cost of government would increase by more than USD5mn a year.
While the BBI proposals have been lauded by senior government figures for promoting a more inclusive and hence stable form of politics, critics allege that the plans are basically designed to enable a broader range of senior political figures to be included in prominent and lucrative positions, thus making it easier to prevent defections from the ruling clique ahead of the 2022 general elections.
Now that the Constitution of Kenya (Amendment) Bill 2020 has been tabled in parliament, and the proposals have received the support of most counties, they must be approved in a national referendum to come into force. This appears to be a forgone conclusion, as the only major national leader opposed to the plans, Deputy President William Ruto, has said that he will not campaign for a ‘no’ vote. However, there is a serious risk that the proposals will not be implemented in time for the 2022 elections. This could lead to calls for the elections to be delayed, or for some of the new provisions to be implemented only after the polls.
Either way, the BBI process will remain controversial, as the deputy President fears that the proposals have been motivated in part by a desire to build and sustain an ‘anti-Ruto’ alliance that would include the likes of former Prime Minister Raila Odinga, Senator Gideon Moi (son of former President Daniel arap Moi), Cabinet Secretary Fred Matiang’i and Speaker of the National Assembly Justin Muturi. The political temperature will rise further as the 2022 election campaign nears, especially if this group makes further moves to side-line pro-Ruto figures within the ruling party.
Rising political tensions will be further stoked by economic challenges. The International Monetary Fund (IMF) decision to approve USD2.34bn extended credit facility and extended fund facility arrangements is a major boost for the economy, which has been struggling due to a recent surge in COVID-19 cases from just over a hundred a day in January 2021 to over 1,000 a day in March 2021. This forced Kenyatta to announce a fresh lockdown and restrict domestic travel, while tourism revenue will be further hit by the UK government’s decision to place Kenya on its COVID-19 ‘red’ (restricted) travel list.
Also, there are concerns that Kenya’s debt burden has become a major restraint on government activity. According to the IMF, the country’s debt level is “sustainable”. However, the IMF also warns that “debt vulnerabilities have increased”, meaning that Kenya “is at high risk of debt distress”. This is particularly significant given that economic growth fell to -0.1% in 2020. The budget deficit of -8.39% in 2020 is expected to widen further this year, and government revenue will continue to be constrained by COVID-19’s impact. On 6 May 2021, news that the COVID-19 variant believed to have triggered the explosion of cases in India had been detected in Kenya and considerably exacerbated fears of a further round of the pandemic.
Kenya suffered a decrease in foreign direct investment (FDI) of 18% in 2019. FDI is estimated to have fallen further in 2020, as FDI to the African continent fell by 11%. Concerns about travel and health restrictions have combined with continuing worries over corruption, which were heightened by the return of Amos Kimunya to national prominence as majority leader. Kimunya had previously been forced to resign as finance minister after a hotel in Nairobi was sold by the central bank for less than half its value, although he protested his innocence at the time.
The ‘handshake’ agreement between Kenyatta and long-term opposition leader Raila Odinga has proved durable and appears likely to hold in the short term, as the two leaders push through the BBI reform package. However, challenges lie ahead, most notably finding an agreement over who will replace Kenyatta as President that will satisfy Odinga and the many other senior leaders within the ruling alliance.
The finalisation of any pre-election deal is also likely to trigger a formal split with Ruto, who is progressively being marginalised within the ruling party, once again opening the threat of violence between his Kalenjin community and Kenyatta’s Kikuyu community. This is particularly significant in the context of COVID-19, when deteriorating economic conditions have increased the prospects for public unrest. Falling trust between Kenyans, international institutions and the political class was highlighted in early April 2021 when 160,000 citizens signed a petition urging the International Monetary Fund (IMF) not to agree a new loan deal.
The curfew and other COVID-19-related restrictions implemented by the government have increased the presence of the security forces in urban areas. This has made it more difficult for terrorist groups to operate. However, al-Shabaab attacks continue in remote areas, and in late March 2021, four passengers were killed and many more injured when a bus ran over a roadside improvised explosive device in Mandera County.
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. The issuance of a terror alert for a pilot wanted by anti-terrorism forces, who is reported to be on a mission to carry out an aviation-based attack, is an important reminder that the threat remains high.
In response to COVID-19, the central bank cut its benchmark interest rate down to 7% by the end of April 2020, where it has remained. Inflation remained contained at 5.9% in March 2021, although this was slightly higher than in previous months due to rising transport costs. Inflation is expected to remain under control due to muted demand pressures.
One of the main aims of the USD2.34bn IMF package is to enable the Kenyan government to bring its debt burden under greater control. However, the debt-to-GDP (gross domestic product) ratio has hit 70.4%, and it is unclear whether economic growth will rebound sufficiently for the government to be able to take on further borrowing without more deterioration. Although the IMF has made what appears to be an overly optimistic growth estimate of 7.6% for 2021, it also forecasts that government revenue as a percentage of GDP will fall in 2021 and 2022.
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