Ekonomisk riskbedömning
Kenya

Kenya

Population 44.2 million
GDP 1,434 US$
A4
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Synthesis

major macro economic indicators

  2014 2015  2016 (e) 2017 (f)
GDP growth (%) 5,3 5,6 6,0 5,3
Inflation (yearly average) (%) 6,9 6,6 6,3 5,5
Budget balance (% GDP) -7,4 -8,3 -7,4 -6,4
Current account balance (% GDP) -10,3 -6,8 -6,2 -5,9
Public debt (% GDP) 46,7 51,3 52,7 53,0

 

(e) Estimate (f) Forecast

STRENGTHS

  • The leading East African economy
  • Pivotal role within the East African Community; the leading African common market
  • Diversified agriculture and development of services (telecommunications and financial services)
  • Improved business climate
  • Dynamic demographics and emerging middle class

WEAKNESSES

  • Country dependent on hydroelectric energy and rain-fed agriculture
  • Persistent bottlenecks and shortage of skills
  • Terrorist risk
  • Improving governance but persistent corruption

RISK ASSESSMENT

A slower but still strong growth

Growth gained momentum in 2016 reflecting favourable weather conditions, the recovery in tourism (reduction in insecurity), cheap oil and increasing public investment. Activity is expected to slow down from 2017 due to the impact on access to credit of the introduction of interest rates controls in September 2016. However, economic growth would remain strong, benefiting from infrastructure modernisation (transport and energy), deeper regional integration and an improved business climate (over the past two years, Kenya has been one of the ten economies to have made the most progress in this area, according to the World Bank).

The deterioration in external and domestic financing conditions, such as to act as a brake on private and public investment, has prompted the authorities to revise downward the macro-economic outlook for their programme (which benefits from IMF support under two new credit facilities agreed in March 2016 as a precautionary measure). Moreover, if the shock felt in 2015 (drop in capital flows and major terrorist attack) has given way to a more buoyant situation, bearish risks continue to weigh on this growth scenario, such as a new phase of market volatility, new security challenges, dependence on weather conditions and a degree of banking sector vulnerability. In late 2015, the banking sector experienced a temporary liquidity crisis. Meanwhile, the cap on maximum interest on loans is putting pressure on the small banks.

Inflation remained within the range provided for by the authorities (5% ± 2.5%) in 2016, despite temporary pressure on food prices. It is expected to converge gradually towards the middle of the target, if weather conditions permit.

 

Twin deficits still high but slightly down

Although slightly down as a share of GDP, the current account deficit is still high due, notably, to the growth in imports of capital goods associated with the implementation of major infrastructure projects (specifically the construction of a new railway line) and oil exploration (operation of the oilfields is unlikely to start for several years due to the absence of an oil pipeline). Exports are projected to continue growing in 2017, because of higher sales of tea, of which the country is the 3rd largest producer and leading exporter in the world, and of horticulture products (2nd largest export item), as well as increased remittances by expatriate workers. In contrast, the oil bill will increase slightly.

After depreciating in 2015 (-12% against the dollar between January and December), the Kenyan shilling stabilised in 2016. Foreign exchange reserves have risen, notably because of the growth in foreign direct investments, so that they now represent about 5 months of imports.

Infrastructure investments and increased spending on security explain to a large extent the high budget deficit levels. These are, however, on a declining trend, due to the improved economic picture, the creation of new taxes and cuts in some spending. The government programme provides for a reduction in the deficit of three percentage points of GDP between 2016 and 2018 thanks, mainly, to completion of phase one of the new railway line project and, to a lesser extent, to the broadening of the tax base, better tax collection and cuts to current spending in favour of development expenditure. The authorities will need to resist pressure on spending in the run-up to the August 2017 elections. The public debt rose substantially in 2014-2015, reflecting a sovereign bond issue, the drawdown on a credit facility granted by China and the granting of a syndicated loan, but the country continues to present a weak risk of debt distress.

 

Potential political tensions in the run-up to next elections

President Kenyatta could stand again in August 2017 for a second five-year term, on a joint ticket with Vice-president Ruto. Both men have had charges against them in connection with inter-ethnic violence following the December 2007 presidential elections dropped by the International Criminal Court. They merged their political parties in September 2016 in order to present a united front at the parliamentary elections, which will also be held in August. The build-up to the campaign and a close result for both elections could foment unrest, even though all parties have agreed to a new electoral law and the appointment of a new electoral commission.

The domestic security situation has improved after the murderous attacks perpetrated by Somalia's al-Shabab group in Kenya in September 2013 and April 2015. A Kenyan contingent, which is part of the African Union force in Somalia, remains deployed in that country.

 

Last update : March 2017

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