Kenya: Outlook Worsening Over Domestic Politics

With its August elections annulled and re-polling now set for late October, Emerging Market Views examines the current political and fiscal outlook for Kenya.

Political Outlook Has Worsened

Kenya is now set to spend longer amount of time under political (and hence policy) uncertainties. If the government caves in to the opposition’s virulent demand of reforms in the election commission before the re-polls, even further delays are possible. Be that as it may, President Uhuru Kenyatta’s victory margin in August, the lack of rigging allegations by the Supreme Court and international observers along with the benefits of incumbency, means that he remains the favorite to win. “The likelihood that this will not go down well with the opposition, even more so than in August, has increased as the annulment has raised expectations,” Raza Agha, Africa and Middle East economist with VTB Capital write in a note to clients this month. “However, if the opposition does not accept the re-poll results again, the government could respond with greater force than it has after the August polls.”

Regardless Of Outcome, Fiscal Outlook Worsening

The near 9% of GDP deficit in fiscal year 2017 is wider than anticipated for any regional issuer this year and is almost three times the long-term average. That fiscal year 2018 targets have been revised upwards, even before Q1-FY18 is done, does not bode well for this year either. Beyond this year, the treasury’s latest indications suggest weaker spending restraint than previously anticipated, while revenue growth is set to remain lackluster. Meanwhile, public debt is running at 57.2% of GDP, the highest since 2003. “We note fiscal consolidation also appears difficult under a Raila Odinga presidency given,” said Agha.

External Sector Weakening

Export growth has been consistently negative since July 2013, save for five months in mid-2016. Import growth turned sharply positive from May 2017 and the trade deficit rose for seven straight months to USD 10.8 billion (annualized) as of July 2017. The growth in remittances slowed for six successive months through June 2017. Hence, the current a/c deficit was at 6.4% of GDP in July 2017 (annualized), with the USD level (>USD 4.6bn) higher in only two years in the last forty. Not surprisingly, usable reserves, while still sizeable at USD 7.5 billionn (5.2 months cover), are down from the peaks of USD 8.3 billion at the end of April.

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