Previous Quarterly Editions
Expropriation Risk: 44 42 40 40 Political Violence Risk: 59 57 54 53 Terrorism Risk: 68 66 64 62 Exchange Transfer and Trade Sanction Risk: 45 44 44 44 Sovereign Default Risk: 54 54 55 57
TREND ► OUTLOOK ▲
The 'handshake' agreement between opposition leader Raila Odinga and President Uhuru Kenyatta in March brought an official end to the prolonged period of post-election unrest and was meant to ensure a degree of political stability. However, internal schisms within the ruling party now risk becoming a further obstacle to sound management of the economy. Deputy President William Ruto, who fears that President Uhuru Kenyatta and his Kikuyu allies within the Jubilee Party will not keep their promise to support his presidential bid when Kenyatta steps down in 2022, has already begun campaigning across the country to strengthen his networks of supporters. Some of his stops while campaigning have included constituencies of his rivals within the government, as led to outspoken criticism within the Jubilee Party. Although Kenyatta will not leave before 2022, the battle to succeed him makes it likely that the coalition at the heart of the Jubilee Party is unlikely to hold. This prospect is already shifting attention away from important areas like infrastructure development in a country where more than three-quarters of the population still have no permanent source of electricity. Moreover, it will make it increasingly difficult for the government to contain corruption, as rival leaders seek to stockpile resources ahead of one of the country’s most unpredictable elections in recent memory. This is a serious concern because, while economic growth remains healthy and should exceed 5% this year, Kenya’s debt burden has ballooned. It has quickly become one of the most indebted countries in Africa with a total debt of 44 billion dollars, which is now more than 60% of GDP. At the same time, raising revenue domestically continues to be challenging. Although VAT at 16% was introduced in 2013, fuel was exempt at parliament’s insistence. In August, Kenyatta appeared to frustrate a further exception and the VAT on fuel came into effect, with the expected revenues of 700 million dollars already earmarked in the 2018-19 budget. In response, petrol suppliers launched a nationwide strike and the president was forced to cut the VAT rate for fuel by half in September. Other new tax proposals have faced similar stiff resistance amid criticism that the government will waste any new revenue through corruption. Other economic indicators remain more positive. The agriculture and forestry sector is growing at a faster rate than last year thanks to a good rainy season. The current budget commits the government to a number of social programmes including universal health coverage and affordable housing. While these are sensible and much-needed priorities, there is concern that the government’s ambitious targets will see it incur further debt in order to deliver on its promises.
Political stability has enabled normal economic conditions and business operations to return in areas that were most impacted by post-election unrest, notably Kisumu and Nairobi. The commitment by Total, which gained a stake in the country’s South Lokichar oilfield when acquiring another European firm last year, to invest in a Kenyan export pipeline despite the challenges of securing land access rights has given a significant boost to the country’s oil sector. The government remains committed to maintaining a business-friendly environment and has made greater investment in manufacturing one of its priorities. However, investors will be wary at the extent to which the 2022 election is already casting a shadow over the political landscape and threatens to impact policy-making.
TREND ▼ OUTLOOK ▲
The agreement between Kenyatta and Odinga has delivered a much-needed period of political calm, but the splits in Kenyan politics remain deep. Either another falling out between Odinga and Kenyatta or a rapid deterioration in relations between Kenyatta and Ruto could quickly trigger fresh unrest and clashes between their supporters. The widening gap between the president and his deputy is of particular concern because the tensions between Kenyatta’s Kikuyu community and Ruto’s Kalenjin community in the Rift Valley region have given rise to the worst violence of the last decade.
TREND ▼ OUTLOOK ►
Although the government has been successful in reducing both the number and magnitude of attacks over the last 12 months, the threat of low-level Al-Shabaab activities remains significant. Moreover, growing evidence of links between drug smuggling and senior politicians, particular at the county level, has raised international fears that the country’s political elite may lack the necessary incentives to clamp down on the local aspects of transnational criminal networks. As a result, Kenya is likely to remain a major conduit for illegal drugs moving from Afghanistan and Latin America to Europe and North America.
TREND ► OUTLOOK ►
Under renewed pressure from the IMF, the government confirmed in June that it is committed to repealing the controversial law that caps commercial interest rates at 4% above the central bank’s benchmark rate. However, although the law has not fostered growth among smaller enterprises as hoped, parliamentary opposition to repeal is likely to ensure continuing delay and the government may try to introduce a new consumer protection agency to regulate lending while leaving the rate cap in place. The central bank followed its cut in March with another in July to bring its interest rate down to 9%. Inflation remains low but has been creeping up in recent months to reach 4.35% in July, although it is still expected to remain below the central bank target of 5% at the end of the year.
TREND ▲ OUTLOOK ▲
The rate at which the country is accumulating debt is now a source of major concern for treasury officials and the IMF. According to the government’s own figures, the debt to GDP ratio rose from 45% in 2014 to 59% in 2017 and is expected to reach 62% this year. If the country’s debt burden continues to increase, long-term economic sustainability will depend in part on the government’s ability to reschedule debt owed to China, which already represents more than 20% of total debt.
Return to contents Next Chapter