Kenya: Risk Assessment
Country Risk Rating
Business Climate Rating
- East Africa's leading economy, playing a pivotal role in the East African Community, the number-one African common market
- Diversified agriculture and expanding services sector (telecommunications and financial services)
- Improving business and governance climate
- Fast-growing population and emerging middle class
- Dependent on hydropower and rain-fed agriculture
- Persistent bottlenecks and skills shortages
- Instability related to terrorist risk and political, social and ethnic divisions
- Persistent corruption
Robust but constrained growth
Growth, although still strong, is expected to weaken again in 2020, after being affected by drought conditions in 2019. Public investment in infrastructure, particularly in transport and energy, is expected to continue to drive activity. The deployment and improvement of the road network, the extension of the railway line between Mombasa and Nairobi to Naivasha and the development of the second container terminal at the port of Mombasa will all be major opportunities for the construction sector. However, growing budgetary constraints, as evidenced by the suspension of general government and parastatal investment spending in July 2019, are expected to result in a slowdown in these activities. These constraints will likewise negatively impact public consumption, despite support for the implementation of the “Big Four” plan focused on industrialization, universal health coverage, food security and affordable housing. Private investment is expected to contribute to growth through PPP agreements and reforms that have improved the business climate. It should also benefit from the lifting of the interest rate caps, which constrained credit growth. Household incomes could be constrained by higher inflation and lower remittances from expatriate workers in the United States and Europe as a result of the less favorable global economic situation, and might therefore be a drag on the contribution from private consumption. Exports are also expected to suffer from softer external demand, which will affect the expansion of the tourism and agriculture sector.
Debt service, the central concern
In 2019/2020, the budget deficit is expected to remain high, even though it may narrow. On the expenditure side, the increase in interest payments, which absorbed about 22% of the revenue collected at the end of the last financial year, will cause current expenditure to go up, despite plans to limit hiring in the public sector in order to contain the wage bill (17% of expenditure). While it should continue to be a priority, capital investment spending is expected to grow at a slower pace. Revenue should be supported by tax measures, including an increased levy on capital gains. Even so, growth will be constrained by deficient domestic revenue collection. External and domestic debt will therefore still be necessary to finance the deficit. Although still mainly concessional, the increase in commercial debt, including Eurobonds issuance, is causing an increase in debt servicing costs.
In 2020, the current account balance is expected to remain roughly stable, posting a deficit again. The trade deficit may stabilize, as compression of the capital goods import bill offsets the increase in exports constrained by the external environment. This is also expected to hamper the growth of tourism revenues and the surplus in the services account. The increase in interest payments should contribute to a wider income account deficit. The slowdown in the EU and the United States, where the majority of expatriates live, is expected to affect the transfer balance surplus. The country's attractiveness to FDI should make it possible to finance the deficit along with debt. Foreign exchange reserves, sufficient to cover more than 5 months of imports, may support the Kenyan shilling, which is vulnerable to capital outflows given the portfolio investment stock held by foreigners.
A fragile domestic environment
In 2017, President Uhuru Kenyatta was re-elected for a second term in an election of which the result was contested by the main opponent, Raila Odinga. However, post-election tensions eased with a reconciliation agreement between the two candidates, which was sealed in March 2018. Despite this truce, the country's political, social and ethnic divisions remain unresolved and could again prove to be a source of instability in the future. The issue of the succession of Uhuru Kenyatta, who cannot constitutionally run for a third term, as the Jubilee Party candidate, may act as the catalyst to start the 2022 presidential race.
In addition, given the country's military involvement in Somalia, Kenya remains a target for Islamist terrorism, particularly by the al-Shabab group. The terrorist attack in Nairobi that killed more than 20 people in January 2019 illustrated this threat. A maritime dispute could also damage the relationship with Somalia. In addition, recurrent trade disputes with Tanzania could hinder the integration of the East African Community, in which the country plays a pivotal role.
The perception of the business climate remains constrained by chronic political instability and infrastructure bottlenecks, but the country continues to reform its business environment. The progress made is reflected in Kenya’s 56th place worldwide (out of 190 countries) and number-three ranking in sub-Saharan Africa. The measures being taken aim in particular to reduce payment delays, by ensuring, for instance, that the Treasury pays its suppliers within 60 days.