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Expropriation Risk: 40 40 40 38 Political Violence Risk: 54 55 53 55 Terrorism Risk: 62 65 66 63 Exchange Transfer and Trade Sanction Risk: 44 44 43 43 Sovereign Default Risk: 56 58 58 60
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The political system remained relatively stable and cohesive during 2019 as a result of the “handshake” agreement reached in March 2018 between President Uhuru Kenyatta and opposition leader Raila Odinga. However, the much-anticipated report from a blue ribbon panel tasked with proposing national reforms following the divisive 2017 elections, and which was meant to be the culmination of Kenyatta’s Building Bridges Initiative (BBI), turned out to be much less incisive than many hoped. Although the president had bought some time and stability by presenting the BBI as an inclusive effort to foster confidence in the political system ahead of the 2022 elections, the process has ultimately failed to foster unity. Odinga remains committed to the long-standing opposition demand to create a new position of prime minister that would operate independently from the presidency. Those around Kenyatta will only accept a prime ministership that is clearly secondary to the president. This disagreement, in addition to tensions over a number of other issues, led to the release of the BBI report being delayed. Its eventual recommendations were much closer to Kenyatta’s position, advocating the retention of a powerful executive presidency aided by a non-executive prime minister whose responsibility would be managing government business in parliament. However, the greatest opponent of the BBI report has been Deputy President William Ruto, who has rejected the BBI process as designed to facilitate an electoral coalition between Odinga and Kenyatta’s allies that would prevent Ruto from taking over once Kenyatta steps down, a succession that Kenyatta repeatedly promised Ruto during the 2017 presidential election campaign to ensure his support. Taken together, these tensions mean that the process of putting the BBI recommendations to the public in a referendum on constitutional amendment is unlikely to go smoothly, and the outcome could be rejected if a powerful “no” constituency emerges. Political debate over the report will harden divisions within both the government and opposition while feeding into ongoing realignments ahead of the 2022 elections, further weakening the main political parties. The situation has not been helped by publication in November of the first national census in a decade, which shows widely varying growth rates across the country. The results, which will determine the constituency boundaries for the 2022 elections as well as the proportion of devolved funds allocated to each county, are being vigorously contested. Delayed rainfall resulted in reduced agricultural productivity, and a lower than expected increase in regional and international trade led to a fall in GDP growth from 6.4% to 5.9% during 2019.
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After foreign investment fell by half between 2017 and 2018, the prospects for long-term economic growth were boosted by a significant uptick in FDI during 2019. Kenya is now ranked fifth in Africa in terms of greenfield FDI relative to the size of the economy. This is partly because it is seen as a continental leader in IT and digital technologies, and partly because of measures introduced by Kenyatta to make Kenya more attractive to foreign investors. This is also reflected in the country’s jump of 19 places in the World Bank’s Doing Business survey for 2019. Despite these improvements, however, investors remain wary of high levels of corruption and the prospect of political instability around the 2022 general elections.
TREND ▲ OUTLOOK ▲
The BBI process has contributed to a growing sense among William Ruto’s allies that Kikuyu leaders within the ruling party are planning to thwart his presidential aspirations. This threatens to undermine the détente between the Kikuyu and Kalenjin communities that has held since Ruto and Kenyatta joined forces ahead of the 2013 general elections. There is a significant risk that ethnic tensions in the Rift Valley region could lead to localised unrest if a national referendum approves constitutional changes that Ruto does not support. However, with the handshake agreement between Kenyatta and Odinga still holding, it is unlikely that unrest would reach or disrupt Nairobi. High levels of youth unemployment may provide willing recruits if political divisions do become serious as the 2022 election comes closer.
TREND ▼ OUTLOOK ▼
The Kenyan government has asked the United Nations to include al-Shabaab on its list of terrorist organisations after its January 2019 attack on the Dusit D2 hotel and office complex in Nairobi in which more than 20 people died. However, this move has been opposed by humanitarian groups, who argue that it would undermine efforts to deliver aid inside Somalia. Government initiatives to develop a more integrated approach to the terrorist threat, including greater coordination at the country level, appear to have led to positive gains. 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.
In October, the National Assembly voted to remove the interest rate cap that had been introduced in 2016 to curb the high cost of borrowing. The cap has failed to stimulate lending to small and medium enterprises and scrapping it has opened up access to a stand-by credit facility from the IMF worth 1.5 billion dollars. The central bank responded by cutting its rate by 50 basis points to 8.5%, citing domestic macroeconomic stability. While inflation remains relatively low at around 5%, late rains meant that the rising cost of food pushed up the Consumer Price Index during the second half of the year. However, both food prices and overall inflation should fall in early 2020 now that the rains have arrived and agricultural output is bouncing back.
While the country’s debt profile is not yet dire, a supplementary budget proposed in November will see public debt increase to 65.4 billion dollars by the end of fiscal 2019-20, with the debt-to-GDP ratio rising to over 62%. Lower than expected tax revenue will also see a deterioration in the balance of payments. Although the government has pledged its commitment to fiscal discipline, President Kenyatta will need to increase public spending in order to deliver his “Big Four” legacy projects, and government expenditure typically increases in the run-up to an election.
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