Previous Quarterly Editions
Expropriation Risk: 42 40 40 38 Political Violence Risk: 57 54 53 54 Terrorism Risk: 66 64 62 65 Exchange Transfer and Trade Sanction Risk: 45 44 44 44 Sovereign Default Risk: 54 55 57 56
TREND ▲ OUTLOOK ▲
Political and economic risk in Kenya is rising as a result of growing instability within the ruling party, with different factions already jockeying for position ahead of the elections in 2022. Rifts between leaders from the Kikuyu community allied to President Kenyatta and leaders from the Kalenjin community close to Deputy President William Ruto have been deepening for years. While relations between Kenyatta and Ruto appear to remain close at the top of the ruling Jubilee Party, their factions are involved in an intense struggle for control of government policy, including opportunities to influence the allocation of spending. The differences will come to a head with the choice of the Jubilee candidate for the presidential election in 2022, when President Kenyatta must step down having served two terms. The party’s vice chairman, David Murathe, has recently broken ranks and left the party so he can urge Kenyatta not to back Ruto as his successor. Murathe is already emphasising the numerous corruption allegations that surround Ruto to suggest that he is not a ‘fit and proper’ candidate for the highest position in the country. Kenyatta’s silence on the issue has been noted. Having dominated the headlines for months, this political infighting was eclipsed in January when an al-Shabaab suicide bomber and five gunmen stormed the Dusit D2 hotel complex in the Westlands neighbourhood of Nairobi, which also houses the offices of a government agency and a number of international companies. The attack killed at least 21 people and injured 30, while security forces successfully evacuated roughly 700 others. The government responded more effectively than it had done during the attack on the Westgate shopping mall in 2013, bringing the incident to an end by the next day. However, the attack is likely to hurt tourism, as well as footfall in large malls that were already struggling with the consequences of expanding retail competition over the past five years, while alarming investors more generally. Economic growth is projected to increase to 6.1% in 2019, having recovered to 5.9% in 2018, but a decline in tourist numbers could result in this figure being revised downwards. News that the current account deficit narrowed to 5.8% of GDP in 2018 from 6.7% in 2017 has eased immediate worries that the country’s debt burden is becoming unsustainable, but serious concerns remain.
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The government remains committed to maintaining a business-friendly environment and continues to seek greater investment. In November 2018, Kenya signed a five-year deal with the European Union for loans and grants worth 4.5 billion euros to support President Kenyatta’s ‘big four’ agenda of building the country’s manufacturing base, strengthening its food security, and increasing access to affordable housing and healthcare. However, investors are wary about the extent to which the 2022 election is already casting a shadow over the political landscape, and particularly the extent to which it threatens to impact policy-making more than three years before polling day.
The increasingly open confrontation between the Kikuyu and Kalenjin factions of the Jubilee Party over its choice of candidate for the 2022 presidential election has significantly increased the prospect of conflict between members of these two communities. However, a significant level of violence is only likely if there is a clear effort by President Kenyatta, or those closest to him, to prevent Ruto from being the Jubilee candidate, and nothing so overt looks likely in the next few months. Open conflict between the ruling party and the opposition also remains unlikely while the ‘Handshake’ agreement reached in 2018 between President Kenyatta and opposition leader Raila Odinga remains in effect. Following the Westgate attack by Somali-based Al-Shabaab in 2013, the government was accused of rounding up and detaining thousands of Somalis on the basis of little or no evidence. So far, it has refrained from doing this in the aftermath of the Dusit D2 hotel attack, raising hopes that a further deterioration in relations with the country’s Somali community can be avoided.
TREND ▲ OUTLOOK ▼
The Al-Shabaab attack on the Dusit D2 hotel and office complex was the first major terrorist incident in Nairobi since 2013. This five-year gap has increased the sense of shock and will lead to more businesses and international organisations moving non-essential staff out of Nairobi. However, given the infrequency of previous Al-Shabaab incidents it is unlikely that this attack will usher in a new wave of activity in the coming months. The effective response of the security forces to the incident has gone some way to improving the reputation of the Kenyan state, which had been badly damaged during the Westgate siege when evidence emerged that soldiers had been looting shops and shooting at members of the police force in a ‘friendly fire’ incident.
TREND ► OUTLOOK ▼
As expected, the central bank left its benchmark interest rate unchanged at 9% in the second half of 2018, having cut it from 9.5% in July. Although the government has consistently said that it is committed to repealing the law that caps commercial interest rates at 4% above the central bank’s benchmark rate, it has still not done so. Inflation is expected to rise to 5.5% in 2019 from just over 5% in 2018, but this still represents a significant improvement over the level of 8% seen in 2017.
TREND ▼ OUTLOOK ▲
Although the current account deficit fell in 2018, this was partly because the 2017 figure was inflated by greater government spending in an election year. For the same reason, there are concerns that the deficit could grow again ahead of the 2020 polls. In particular, the decision of the government to contract new loans and grants totalling 4.5 billion euros from the EU during a period when a number of large loans will mature has raised concerns that another economic downturn could result in an unsustainable debt burden. Total public debt was estimated to be around 50 billion at the end of 2018 but is projected to reach 60 billion dollars by as early as the end of 2020.
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