Kenya: Risk Assessment
Country Risk Rating
Business Climate Rating
- East Africa's leading economy
- Pivotal role in the East African Community, the leading African common market
- Diversified agriculture and expanding services sector (telecommunications and financial services)
- Improved business climate
- Dynamic demographic and emerging middle class
- Country dependent on hydroelectric power and rain-fed agriculture
- Persistent bottlenecks and skills shortages
- Terrorist threat
- Improving governance, but persistent corruption
- Ethnic divisions
Strong Growth Despite the Political Uncertainty and Slow Credit Growth
Slowed by the drought, the slow progress of credit and political uncertainty in 2017, growth is expected to be strong in 2018. It will feel the benefits of the ending of the drought conditions which acted to restrict growth in the primary and secondary sectors (with the agri-industries). Cash crops (tea, coffee and horticulture) should therefore help redress the negative contribution to the balance of trade. Public investment will continue as driving force of growth, thanks mainly to the development of infrastructure projects. Start of work on the road between Malindi and Bagamoyo (Tanzania) will boost the construction sector. Completion of projects, such as the Nairobi-Mombasa rail link and the opening of the second container terminal at Mombasa port, will boost the transport sector. However, despite the range of initiatives attempted to improve the business climate, the inadequacies of the credit supply and the clashes triggered by the difficult electoral context in the second-half of 2017, could lead to a slowdown in private investment. The political situation could also impact on household consumption, although this should remain firm thanks to a fall in the rate of inflation. Consumption will also be the driving force for services, despite tourism, on an upwards trajectory, possibly suffering the negative perceptions of a worsening security situation. Whilst the pressures on food prices have eased, the removal of subsidies on foodstuffs and domestic demand mean that inflation is likely to remain around the middle of the Central Bank’s target range (5% ±2.5%).
Cost of Elections Weighs Down Public Accounts
After widening in 2017 as a result of increased current expenditure, mainly because of the organization of two election, the budget deficit is expected to shrink in 2018. The removal of subsidies on corn, introduced to deal with the risk of food shortages, should reduce the level of current expenditure. Reducing this latter, which has been constantly growing in recent years, is a priority for the Treasury, with the aim of giving itself room for maneuver in increasing development spending. Strong growth and the reforms to the tax administration should help to further boost receipts. The deficit will once again be financed through a combination of domestic, the majority, and foreign borrowing. Whilst the external debt (52% of the total stock) is for the most part concessionary, the rapid escalation of indebtedness is of growing concern. The build-up of domestic debt may generate a crowding-out effect on the private sector.
The current account deficit should reduce slightly in 2018. The scale of the balance of goods deficit is however expected to continue weighing on the global balance the improvement in climatic conditions will allow increased exports of tea and horticultural products. Although the first barrels of crude should start being exported in 2018, the oil will not make a significant contribution to reducing the trade deficit before 2021. Imports of capital goods will continue at a high level, but with a rate of growth below that of exports. The balance of invisibles (services, transfers and revenues) will remain in surplus thanks in the main to tourism and remittances from expatriate workers. Despite the reigning political uncertainty, the country is still an attractive proposition for foreign capital, making it possible therefore to finance the deficit. In addition, its currency reserves, equal to 5 months of imports, will provide a buffer against potential external shocks, and help limit the volatility of the Kenyan shilling.
Political Uncertainty Undermining Business Climate
In 2017, President Uhuru Kenyatta was re-elected for a second term of office at the end of a contentious political process. The general elections on 8 August 2017, anxiously awaited given the country’s history of political instability, led to an unexpected outcome. Following the announcement of the re-election of Mr. Kenyatta (54% of votes) and, notably, after Raila Odinga, the leading opposition candidate, had rejected the results produced by the Electoral Commission (IEBC), the Supreme Court cancelled the election result on the grounds of irregularities, for which the IEBC was held responsible, and called for the holding of a new election. Tarnished by a boycott by M. Odinga, who deemed the reforms of the IEBC inadequate, the victory of the outgoing president with more than 98% of votes, but with a very low turnout (39% against 79% in August), during the election on 26 October, was validated by the Supreme Court. Although Mr. Kenyatta was sworn-in, the rejection of the outcome by the opposition and the refusal to cooperate could hinder the restoration of normal governance. Alongside this political incertitude there is also the security environment and the ongoing threat from Shebabs, undermining the perception of the business climate. According to the Doing Business 2018 rankings, this has improved: the country simplified the business creation process, shortened the registration process with a dedicated office and set-up a platform allowing companies to submit tax declarations on-line. The country is thus in 80th place in the world rankings in terms of doing business, and in third place regionally.