Previous Quarterly Editions
Expropriation Risk: 52 53 53 55 ▲Political Violence Risk:51 51 51 51 ►Terrorism Risk:60 60 64 64 ▲Exchange Transfer and Trade Sanction Risk: 55 55 55 63 ▲Sovereign Default Risk:66 66 66 66 ►
TREND ▲
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Kenya had historically adopted a complex approach to its international relations. On one hand, successive leaders have been highly critical of the U.K., as the former colonial power, and to this extent have been seen to be hostile to Western political interreference. This was most obviously the case recently when the government of former President Uhuru Kenyatta and President William Ruto orchestrated governments in sub-Saharan Africa to reject the authority of the International Criminal Court after they were charged with crimes against humanity for the role they played in post-election violence in 2007-08.
However, the U.K. and U.S. are actually Kenya’s closest allies, and in many ways its economic role models. Eschewing African socialism, from the 1960s onwards successive governments have pursued a form of trickle-down economics that has looked much more like the U.S. than China or Russia. Moreover, there are strong ties between Kenya and the West, with leaders such as Kenyatta educated at U.S. universities. x
It should therefore be no surprise that, despite its high-profile criticism of Western interference, Kenya retains strong security ties with London and Washington and is seen as a key ally in the fight against terrorism. Most notably, Washington relies on Kenya to support its operations in Somalia and to prevent the expansion of Al-Shabaab. Meanwhile, London retains an important training base for its troops at the British Army Training Unit in Laikipia county.
The growing prominence of China and Russia on the African scene has done relatively little to change this situation. The Kenyan government is willing to engage with any partners that back its political and economic vision and has generally sought to engage with a multiplicity of international partners on its own terms. Thus, while there has been growing levels of Chinese investment and trade, with six bilateral trade agreements signed in 2022, this has not led to a weakening of ties with Western states. Indeed, as of September 22, the U.S. is the number one destination for Kenyan experts, having overtaken Uganda.
This situation appears to be relatively stable and relatively well accepted. The country’s international alliances were not a significant feature of the 2022 general election campaign, in which former Deputy President Ruto defeated Raila Odinga, whose campaign was backed by Kenyatta. It is possible the country’s new president will seek to foster stronger ties with China and Russia, but he is also seen as being close to London and well understands that Kenya requires the support of range of international donors if it is to implement his vision of ‘bottom-up’ economics while reducing its growing debt burden.
Between 2022 and 2021, Kenya suffered a further decline in foreign direct investment, with a fall of USD269 million to a total of USD448 million. This is a historically low figure, which may reflect investor concern at the risk of political violence around the 2022 general elections. However, it also appears to be driven by a revival in the East African region, with investors moving to other locations where there is less risk of instability and corruption. This may improve now that the elections are over, but only if President Ruto can persuade observers that he is serious about reducing corruption.
TREND ►
The prospects for political violence have decreased significantly following the 2022 elections. While the campaign saw rising ethnic tensions and hate speech, they were largely peaceful, in part due to the nature of the main coalitions, which integrated several ethnic groups and both featured Kikuyu leaders as presidential running mates, diffusing the significant of Kikuyu/Luo and Kikuyu/Kalenjin cleavages.
Although the announcement of the results was extremely controversial, disturbances remained at a relatively low level and passed quickly. The country remains politically tense due to the refusal of losing candidates to accept they lost, but their decision to accept the Supreme Court’s ruling that upheld Ruto’s election means significant political violence is now unlikely.
However, the risk of violence due to protests remains considerable. One of the things that propelled Ruto’s victory was high levels of popular anger over the state of the economy. Annual inflation increased to 8.3% in July 2022, while the price of food and non-alcoholic beverages increased 15.3%, and transport prices were up 5%. Inflation rose further to a five year high of 8.5% in August, mainly due to further increases in the price of food.
This presents a major challenge for Ruto, who campaigned on improving conditions from the bottom-up. If he is unable to deliver on this pledge then unrest, especially from groups that voted for Odinga, will become significantly more likely.
Greater restrictions on travel appear to have made it more difficult for terrorist groups to operate, and there has been a significant reduction in the number of high-level terrorist attacks. However, a series of attacks that led to around seven deaths and a number of arson attempts in early January led the government to declare a dusk-to-dawn curfew in Lamu, on the border with Somalia.
These incidents are particularly significant because they reflect domestic tensions over control of land, resources, and political power as much as they do the efforts of the Al-Shabab terrorist network based in Somalia. There is also concern among security experts that Al-Shabab activity, generally believed to have fallen during the pandemic, is likely to increase now travel restrictions have been removed. However, rumours of a major attack around the 2022 elections did not materialise.
The central bank unexpectedly increased interest rates to 7.5% in May, partly in order to try and restrain inflation, and has kept them there ever since. This reflects a genuine concern to keep inflation within its target range, but prices have continued to rise, especially when it comes to food, as seen above. With a significant food shortage in much of East Africa, with more than 50 million facing acute food insecurity, this driver is unlikely to fall soon.
Despite the rhetorical commitment of the Kenyan government to reduce the country’s debt burden, it continues to rise. One reason for this is the government increasing expenditure in several areas ahead of the 2022 elections as it struggled to maintain political support. Another factor is the government failing to invest in projects that have made the economy more productive, and so an increasing proportion of government spending is going to servicing the country’s debt.
The central bank now expects the total debt stock to increase to over 10 trillion shillings, or USD87 billion, by 2024, which could represent fully 75% of GDP. Ruto will therefore come under increasing pressure to reduce government spending, but he will be wary of doing so given the promises made during the campaign.
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