Kenya politics: Election uncertainty threatens business outlook

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Country Data and Maps
Economist Intelligence Unit
No abstract is available.
Politics, News Analysis
Political Geography

Kenya is entering uncharted political territory, to the detriment of its economy. The election impasse is now becoming the main worry among investors. Combined with unsustainable state spending and a major drought that preceded the election period, the risk of political clashes threatens to derail Kenya's economic growth for the remainder of 2017 and in 2018. In September the government cut its real GDP growth forecast for 2017 from 5.9% to 5.5%, approaching our estimate of 5.1%. Henry Rotich, the cabinet secretary for the National Treasury, openly admitted that the election period was affecting spending and tax revenue, and announced that the revised growth figure may have to be revisited again.

The unprecedented Supreme Court ruling on September 1st that annulled the August 8th presidential election has provided little guidance on how to remedy the faults with the Independent Electoral and Boundaries Commission (IEBC) that the judges highlighted. Raila Odinga, who came second to Uhuru Kenyatta in the August election, has therefore gambled, boycotting the rerun of the August election (scheduled for October 26th) until his demands are met, namely that a fresh election be held within a 90-day period following a near total overhaul of the IEBC. Mr Odinga's National Super Alliance (Nasa) had argued that the IEBC's failings had, in effect, forced him to withdraw and that the rerun should be cancelled. However, the IEBC's decision to go ahead with the rerun involving all the original candidates (rather than just the two leading candidates) was maintained following a petition by Ekuru Aukot, a minority opposition party candidate. The prospect of Mr Odinga's absence is regrettable, since it puts his support base on a collision course with the rest of Kenyan society, and legal experts argue that he has handed the legal credibility back to his rivals. A police ban on demonstrations has already been overruled by the courts. The interpretation of Kenya's constitutional stipulations around these events means that subsequent recriminations are likely to fester for several months, probably beyond the end of the year.

Economic performance is deteriorating

The prospect of further uncertainty is bad news, because East Africa's largest economy entered its notoriously expensive election season on an already fragile footing. Early this year northern parts of the country faced one of the most protracted droughts in recent times, leading to nationwide year-on-year inflation of 11.7% in May. This has since subsided to 7.1% in September, mainly because of government subsidies for maize. The government is also saddled by expensive infrastructure projects, a rising public wage bill and a costly security operation in Somalia. These costs will contribute to a budget deficit of 7.2% of GDP for fiscal year 2017/18 (July-June). Driven by a slight worsening of the current-account deficit to 6.1% of GDP in the first half of 2017, mainly due to higher fuel and food imports, debt-service costs amounted to KSh271.3bn (about US$2.6bn) in 2016/17, equivalent to almost 20% of revenue. Notwithstanding this, campaigning for the August election was estimated to have cost US$1bn, or around US$24.5 per voter-one of the most expensive on record. The president, Mr Kenyatta, also recently signed into law KSh12bn in election-related spending.

Beside the huge pressures on the public purse caused by the elections, the threat of extended instability is hitting private-sector activity, which has already been negatively affected by the annulled August election. Most sectors reported losses over the August election week, and further negative signs have appeared since the Supreme Court's ruling. Safaricom, a telecoms company and the country's largest listed firm, announced a loss of between US$3m and US$4m on its popular M-Pesa payments platform during the election week. ARM Cement, a construction supplies manufacturer, said that sales had dropped by 15% during the same period. Further hits to margins were reported in the transport, construction and financial sectors. Since the Supreme Court's announcement on September 1st, the Nairobi Securities Exchange All Share Index has been the third worst performer in the world, and yields on Kenya's international debt have climbed to 6.46%. Tourism, a key source of foreign exchange, bringing in about US$1bn a year, has hitherto been largely unaffected by the uncertainty, but this could change, despite an improvement in rainfall. The Kenya Association of Manufacturers, which represents 1,000 companies, expects a similar slowdown in business during the election rerun. This is disquieting, since the manufacturing sector alone contributes 10% of Kenya's overall GDP. It is a major pillar upon which the country's aspiration to achieve middle-income status-expressed in Kenya's Vision2030 strategy-are being built.

Violence is the greatest risk

Fears of violence, and of its impact on the economy, are well grounded given Kenya's recent history. The economic impact of the 2007 post-election crisis-which saw large-scale violence-was huge: real GDP growth plummeted from 6.9% in 2007 to 0.2% in 2008. So far this year, violence has been fairly limited. According to human rights groups, most deaths came during riots, with 67 people killed since the August election, mainly as a result of excessive police force. However, looting and arson have taken place in urban centres, forcing business closures. Not surprisingly, these businesses have repeatedly expressed their concerns about protests. In October the Kenya Private Sector Alliance, a business lobby group, met the president, prompting him to reassure them that "no politician" would threaten peace and stability. Separately, on October 13th, the Nairobi business community released a statement calling on politicians to overcome their differences. Since Nasa stated it would disregard a ban on protests, the Hood Group, an association of the capital's business community, also requested the installation of picketing areas in order to minimise disruption. The prospect of large-scale violence is still slim, but its dynamics are hard to predict. Much will depend on both Mr Odinga's and Mr Kenyatta's power to defuse tensions among their supporters-something that will become harder if their rhetoric spirals out of control in the aftermath of the vote.

Post-election prospects

Because of this, it is now becoming harder to envisage a return to business as usual for the next three to four months. The resignation of a key IEBC official, Roselyn Akombe, has thrown the institution's credibility further into doubt, but the IEBC is proceeding with preparations for the election rerun, which is still likely to go ahead on October 26th. Mr Odinga recently indicated that he would be open to participating if his demanded changes to the IEBC took place in time, and the current turmoil at the IEBC appears to be working in his favour, although time is running out. The prospect of disruptions around the rerun will result in pre-emptive factory shutdowns and the cancellation of events and may entail a slowdown in tourism, especially given the high-profile coverage of the election saga abroad (especially in Europe). Stockmarket activity is likely to remain in limbo, with significant downside risks should periodic violence emerge. The likelihood of a downward revision to our real GDP growth for 2018, currently 5.3%, is rising.

If events run their course then Mr Kenyatta is almost certain to win the rerun almost uncontested, which will in turn probably trigger another legal challenge by the opposition. A second mandate for Mr Kenyatta would entail for the most part a continuity of pro-market policies, centred on the rollout of major infrastructure projects. Should Mr Odinga somehow jostle his way to power, the result will be broadly similar, but with a greater orientation on local, socially redistributive economic policies. This will provide opportunities but also many challenges, given the complex land rights issues and the fractured nature of Kenya's ethnic politics that underlie the current instability.

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