Kenya: Risk Assessment
Country Risk Rating
|B||Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Growth still dynamic, buoyed by private consumption and public investment
Growth remained buoyant in 2015 despite a lack of rain and another fall in the number of tourists. Activity was driven by private consumption, which benefited from lower oil prices, job creation and public investment in infrastructure (including the construction of a railway line and new geothermal electricity plants). Meanwhile, on the supply side, the services sector, driven by telecommunications and financial services, was still one of the most dynamic of the continent. In 2016, growth is expected to continue to benefit from the rise in development spending, but will be less dynamic than initially expected. Heightened volatility on the world markets and terrorist attacks have led the authorities to revise the macro-economic prospects of their program downwards (this benefitted from IMF support under two credit arrangements approved in February 2015 as a precautionary measure). Downside risks continue to put pressure on this new growth scenario. A sharper deterioration in financial conditions (linked to the normalization of monetary policy in the United States) or economic conditions in Europe (major market for tourism) would affect activity. The same would be true if FDIs in oil exploration were to slow due to the oil market slump.
In the medium term, the authorities expect the planned expansion in transport and irrigation network infrastructure, as well as the establishment of alternative energy sources, to lead to a significant expansion in trade and less vulnerability to weather conditions, as the country depends heavily on hydroelectric energy and rain-fed agriculture. In 2015, Kenya made progress regarding the business climate, simplifying procedures to start up a new business and to register property, and to improve access to credit and electricity. Inflation remains within the authorities' target range. Higher food prices at the start of the year, and the depreciation of the shilling prompted the central bank to raise interest rates twice in 2015.
The country is running significant twin deficits linked to its great need for infrastructure
The trade deficit remains large due to the substantial growth in imports of capital goods associated with infrastructure modernization and oil exploration. Moreover, although diminishing, the energy bill remains high. Only a strong expansion in the geothermal sector and the start of oilfield operations will enable it to be reduced in a few years. Exports are expected to continue to rise in 2016 thanks to robust prices for tea, of which the country is the third largest producer and the leading exporter in the world, and the recovery in sales of horticulture products (2nd leading export item). As for invisibles, tourism income is down but remittances by expatriate workers continue to grow. Thanks to the rise in FDIs, foreign exchange reserves grew until 2014, since when capital flows have, nonetheless, been on a slowing trend, in a context of greater volatility on world markets. However, reserve levels remain satisfactory. The budget deficit is also high due to the investment in infrastructure. Expenditure (construction of the railway line, security, transfers to the counties and support for the national airline) rose substantially in the 2014/15 fiscal year. Higher excise duty and improved tax administration should help contain the deficit in the 2015/16 fiscal year. Public debt rose markedly in 2014, pushed up by the issuance of sovereign bonds and the drawing down of a credit line awarded by China, although its sustainability is not in question.
The security risk remains high
The adoption of a new constitution in 2010 and the peaceful conduct of the 2013 general election have improved the outlook for political stability. President Kenyatta should be able to serve a full term. He could even stand again in August 2017, especially as the International Criminal Court has dropped its charges against him in connection with the inter-ethnic violence following the December 2007 presidential election.
The country is still in the grips of significant insecurity following the murderous attacks perpetrated by the Islamic Al-Shabaab group in September 2013 (Westgate shopping center in Nairobi) and in April 2015 (Garissa university), presented by this group as revenge for the operations carried out in Somalia by the Kenyan army.