Kenya: Risk Assessment
Country Risk Rating
Business Climate Rating
- Sixth-largest African economy (2020), but the biggest in East Africa, playing a pivotal role in the East African Community, Africa's number-one common market
- Diversified agriculture (40% of GDP, third-largest tea producer in the world) and dynamic services sector (IT, telecommunications and financial services)
- Mombasa is the third-largest port in Africa
- Mineral sand deposits (comprising ilmenite, rutile and zircon)
- Hydrocarbon deposits discovered in the northwest region of Turkana
- Fast-growing population and emerging middle class
- Continued execution of the president’s Big Four Agenda (originally planned until the end of 2022, but probably will go on longer), which is focused on food security, manufacturing employment, universal and affordable access to health, and affordable housing
- Reliant on hydropower and rain-fed agriculture: sensitive to drought and flooding
- Weak public resources (17% of GDP in 2020) and high public debt
- Persistent bottlenecks due to lack of infrastructure and skills shortages
- Terrorist risk in the north, near Somalia; political, social and ethnic divisions
- Persistent corruption and governance deficiencies, including in state-owned companies
Vaccination campaign underpins a more robust recovery
The acceleration of the economic rebound in 2022 partly depends on the vaccination progress, which needs to catch up. This will expose the country to fresh COVID-19 outbreaks that could lead to longer or stricter restrictions, particularly in the first half of the year, and should further discourage tourism from abroad (10% of GDP and 9% of employment in 2019). Private consumption (81% of GDP) is expected to be the key growth driver in 2022, thanks to the labor market's recovery. With the slow return of tourists from the second half of 2022 onwards, the unemployment rate could fall back to its pre-COVID level of 5%, resulting in higher wages. However, higher inflation - due to higher energy prices following the reduction in subsidies – will erode some of the gains in purchasing power. The price pressure is not reflected in the yearly inflation rate in 2022 due to special effects from the previous year. The Central Bank of Kenya is expected to respond to inflation by hiking its interest rate from its decade-low of 7% to 7.5%, which could also support capital inflows. A new trade and investment deal with the UK worth USD 184 million will drive investments (17% of GDP). In addition, the British oil exploration firm Tullow Oil has finally presented its plan to bring the Lokichar (Turkana county) oil field on stream after several postponements, but further investments will likely be postponed again. Fiscal consolidation efforts will limit growth in public investment and consumption. This is the basis for a new three-year financing package (Extended Fund Facility and Extended Credit Facility) approved by the IMF in April 2021. Net trade should remain a drag to economic growth. Merchandise exports (12% of GDP) will continue to benefit from the strong demand for fruits and vegetables (14% of exports). Still, the growth of tea exports (23%) should remain sluggish due to solid supply from other exporters on the global market. While services exports should increase noticeably with the slow return of tourists, higher imports should more than offset this development.
High twin deficits and debt
While remaining significant, the deficit forecasted in the 2021-2022 budget falls noticeably. The government removed COVID-19-related subsidies and expenditures, while further economic recovery will generate higher receipts. Nevertheless, authorities should still increase spending to fight insecurity and drought in the North as part of the 3rd stimulus package (November 2021). A narrower budget deficit aligns with the current IMF program, with USD 2.34 billion at stake, of which USD 984 million have already been disbursed. Nevertheless, public debt will still grow, but at a slower pace, up to 70% of GDP. The current account deficit should remain at around 5% of GDP. An increase in the considerable merchandise trade deficit will offset positive developments from services exports and higher remittances from Kenyans living abroad. Public external debt (37% of GDP), which is divided between commercial (30%), bilateral (China holds 30%, around half of it), and multilateral creditors (40%), should continue to climb, also because of the high debt service that will increase with the end of the suspension of bilateral debt servicing this year.
All eyes are on the presidential election
The context of the presidential election, scheduled in August 2022, became more complicated after Kenya’s High Court ruled in May 2021 to reject the planned constitutional amendment that would have most notably introduced the position of Prime Minister. To secure political stability, this reform was originally part of a truce between President Kenyatta and Raila Odinga, his primary opponent in the 2017 election. This means that Kenyatta will not be able to retain some power by occupying the prime minister position after his second and final presidential term ends this year. Nonetheless, in a country where many still vote along ethnic lines, Kenyatta, an ethnic Kikuyu (17% of the population, the largest ethnic group), declared his support for Odinga, a Luo (11% of the population), forming an unusual alliance. This could put Deputy President William Ruto - a member of the Kalenjin ethnic group (13%, the third largest) who has not received the president’s support due to personal disagreements - in the best position to win the election with the help of his ethnic group and some of the disappointed Kikuyu. Due to the concentration of power, elections are driven by ethnic voting and are often accompanied by violent outbreaks. Ruto has also gained a lot of support among young people by staging himself as the candidate of the “Hustler Nation” in opposition to Kenyatta and Odinga, names that have been at the forefront of the domestic political scene since the 1960s.