Kenya: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Continuation of the government stimulus programme in 2011
Economic growth accelerated in 2010, fuelled by private consumption (77% of GDP) and corporate investment, underpinned by government fiscal and monetary measures implemented at the end of 2009. The economy also benefited from a significant rebound in agricultural exports particularly spurred by firm prices for black tea (second largest source of foreign currencies) and an increase in tourism revenues and remittances from expatriates. This trend is expected to continue in 2011. Nevertheless, export growth will slow down due to less buoyant tea prices. Imports will significantly accelerate, spurred by household spending on manufactured goods (IT and telecommunications will be especially revitalized with the coming online of the Seacom submarine cable, which provides the country fast and cost-effective Internet access), and by corporate capital equipment purchases. Growth will also be spurred by Government infrastructure spending and the financial services sector. However, interest rates on commercial credit are expected to remain relatively high, although the Central Bank has softened its monetary policy by lowering its key rate to 6%. Inflation, down to 4.2% in 2010, could go up again this year (to around 6%) fuelled by wage increases and rising food prices.

Stabilisation of public debt and foreign currency reserves
The economic stimulus policy will cause the budget deficit to remain significantly large in 2011. Revenues resulting from the strong growth and improved tax collection in conjunction with recourse to domestic borrowing and concessional loans from donors will enable the government to meet its financial needs. Public debt is expected to stabilise around 50% of GDP, while foreign debt will be contained. The current account deficit will worsen appreciably, despite the good performance of income from tourism and of remittances from expatriates. The recovery of foreign direct investment is expected to be sufficient to finance this deficit. Foreign direct investment is not expected, however, to return to the levels prevailing before the outbreak of interethnic violence in 2007. Recourse to the IMF in June 2009 (via a $200 million loan) has fostered support from other financial donors. Nevertheless, poor governance continues to damage relations between Kenya and investors. The government will then probably continue to have difficulty financing infrastructure projects. The business environment is expected to improve slightly with the ongoing implementation of economic reforms.

2011 is a pre-election year, a decisive one for the pursuit of reforms
Although internal power struggles remain intense, the political situation seems to have eased since the post-election confrontations of 2007. A new constitution was adopted in August 2010, setting up a presidential system with a division of powers between the federal government and the regions. It also notably provides for the creation, of an anti-corruption agency and an agrarian reform commission. The consensual policies followed by the governmental coalition of President Mwai Kibaki's Party of National Unity (PNU) and Prime Minister Raila Odinga's Orange Democratic Movement are expected to continue until the next elections scheduled in August 2012.
The fact that Mwai Kibaki cannot run for a third term is expected to stoke the ambitions of those aspiring to lead the party leadership with Raila Odinga, the likely  ODM candidate. Preparations for the elections will mark 2011 and could engender some unrest with Kenya not immune to pre-election political excesses.

Strengths

• Diversified agriculture (tea, coffee, horticulture)
• High value-added sectors (financial services, telecommunications)
• Solvent, profitable banking sector, effective in providing financing to the economy
• Strategic position between West and East Africa
• Membership in the first African common market, the EAC (East African Community)
• Good performance of telecommunications and financial services
• Strong demography and emergence of a middle class (20% of the urban population)
• Adoption of a new constitution

Weaknesses

• Farm sector exposed to drought and deficient transport and energy infrastructures
• Uncertainty over Kenya’s political stability and chances for success in implementing key reforms
• Wide-spread poverty
• Corruption and poor governance
• Strong dependence of agricultural production on weather conditions
• Insufficient infrastructures to absorb economic development (Port of Mombasa, road and energy networks)
• Latent risks of political excesses