Country Risk Rating

B
Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable. - Source: Coface

Business Climate Rating

A4
The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.

Strengths

  • Seventh-largest African economy (2019), but the biggest in East Africa, playing a pivotal role in the East African Community, Africa's number-one common market
  • Diversified agriculture (third-largest tea producer in the world) and expanding services sector (telecommunications and financial services)
  • Mombasa is the third-largest port in Africa
  • 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, which is focused on food security, manufacturing employment, universal and affordable access to health, and affordable housing

Weaknesses

  • Reliant on hydropower and rain-fed agriculture: sensitive to drought and flooding
  • Weak public resources (17% of GDP)
  • Persistent bottlenecks due to lack of infrastructure and skills shortages
  • Terrorist risk in the north near Somalia; political, social, and ethnic divisions
  • Persistent corruption

 

Current Trends

Moderate recovery after a cushioned blow

In 2020, the COVID-19 crisis took the edge off the usual strong growth. The main cause was the fall in tourist activity (10% of GDP and 9% of employment) with international flights suspended until August. Investment (17% of GDP in terms of demand) was hit by budget cuts and a drop in confidence among national and foreign private decision-makers. Despite the reduction in employment, particularly in tourism, consumption was relatively spared due to the absence of a total lockdown, but also because of the resistance of expatriate remittances and tax giveaways. Overall, the fact that agriculture accounts for a major share of the economy (40% in terms of supply) undoubtedly played a protective role.

In 2021, a recovery is expected, but it will not be enough to restore the long-term trend. Barring a resurgence of the epidemic, locally or globally, requiring distancing measures to be re-imposed, consumption should play the main role, given its importance (81% of GDP). Services (45% of GDP), particularly trade and telecommunications with the rise of online money movements, will be the main beneficiaries. The investment will remain timid. Its public component will continue to be constrained by the deterioration in the budgetary situation, which is compounding recurrent deficiencies in areas such as under-execution, under-financing, late payments, and judicial remedies. However, housing construction is expected to return to its previous strength, with an estimated shortage of 300,000 units, while water supply, sanitation, and roads will benefit from international financing. The private sector will have to contend with caution in the banking sector, with doubtful loans making up 15% of banks’ portfolios at the end of 2020, despite restructuring. Furthermore, Total has postponed the decision to bring the Lokichar oil field in Turkana on-stream until the end of 2021. Exports (12% of GDP) will continue to benefit from resilient tea (23% of exports), fruit and vegetable (14%), and coffee (4%) markets. Flower sales will depend on the reopening of European florists. Tourism will be slow to start up again due to caution among potential customers, which will continue to be a drag for transport. Given the upturn in imports, linked to the recovery in consumption, the contribution of trade to growth should be slightly negative.

High public and external deficits

The budget deficit, which was already high, increased slightly in 2020 due to the automatic drop in revenue resulting from tax giveaways (standard VAT rate cut from 16% to 14%, corporation tax reduced from 30% to 25%, tax breaks for the lowest earners, rate for the top bracket lowered from 30% to 25%). At the same time, social and health expenditure increased. The country was forced to turn to the IMF (USD 739 million) and the World Bank (USD 1 billion) both to make up the deficit and to finance projects. As a result, public debt could reach 70% of GDP, excluding state-owned enterprises and state-guaranteed debts, which is considered high risk by the IMF. Once the crisis is over, tightening could take place from the fiscal year 2021-2022 onwards, especially if a new program is agreed with the IMF.

Paradoxically, the substantial current account deficit narrowed in 2020, in parallel with the trade deficit, as imports fell on weaker domestic demand. However, the reduced services surplus linked to the fall in tourism mitigated the movement. Expatriate remittances remained high, as expatriates may have drawn on their savings to compensate for reduced income and taken advantage of shilling depreciation. In 2021, the current account balance should follow the opposite pattern as domestic demand firms. Public external debt (35% of GDP in June 2020) continued to climb, as a foreign direct investment remains limited (1% of GDP). However, because of IMF and World Bank loans, the share held by multi- and bilateral creditors (especially China) rose to 70% of the total. Because of the deficits, the currency is expected to continue to depreciate, but not by enough to correct its slight overvaluation due to inflation. Depreciation has been slowed by interventions by the central bank, whose reserves edged down to five months of imports in September 2020.

Relative political stability

Since the reconciliation between President Uhuru Kenyatta and Raila Odinga, his main opponent in the 2018 election, relative political stability has prevailed. Both men want to hold a referendum before the 2022 election on the proposals made as part of the Building Bridges Initiative, which include re-establishing the post of the prime minister, reforming the voting system and the electoral commission, and giving a formal role to the leader of the opposition. One of the goals is to reduce ethnic voting. Externally, negotiations have begun with the United States on a trade agreement, which could conflict with the rules of the East African Community and the future Pan-African free trade area. On the security front, incursions by Al Shabab Islamist armed groups from Somalia are taking place in the north of the country.

Source:

Coface (02/2021)
Kenya