Kenya — Uncertainty ahead in 2017

National elections provide a period of excitement, especially in growing democracies, but in Kenya it is time for hopelessness. The cycle of election violence that has existed for more than 20 years is hovering again as the country prepares to go to the polls on 8 August. The fear, uncertainty and desperation are evident across the nation. In 2008, a disputed poll almost led to civil war. The country’s economy slumped from a consistent 7% growth to 1.7%, while 1,300 people died and 600,000 were displaced. Since then, the need for political risk insurance has become a priority. Business leaders say the August election poses the biggest risk for the country, as the high number of unemployed youth may be used to spread violence. “With 2017 being an election year, the last thing we want is a large pool of disgruntled and jobless youths who can easily be manipulated into backing nefarious political agendas,” says Kiprono Kittony, chairman of the Kenya National Chamber of Commerce and Industry. The World Bank says Kenya has an unemployment rate of 40%. During the post-election violence of 2008, the majority of those who participated in the violence and lost their lives were the young. That violence dented the global reputation of Kenya and lowered the country’s diplomatic influence in Africa, which it has been rebuilding in the last four years. “Our foreign relations could improve or deteriorate this year, depending on how peaceful the elections are,” says Mr Kittony. President Uhuru Kenyatta, 55, will go up against former Prime Minister Raila Odinga, 72, in the elections. Mr Kenyatta will be pushing his achievements in the construction of mega projects like the 500km standard gauge railway, tarmacking of roads in rural areas and provision of specialist hospital equipment in all 47 counties. Mr Odinga, meanwhile, will cite the wave of corruption allegations that have dented the reputation of Mr Kenyatta’s first term in office. The electoral body, a major source of conflict in Kenya’s elections, has been disbanded and new members recruited. However, the opposition has been on a relentless campaign over allegations that the commission is being used by Mr Kenyatta to rig the August elections through fraudulent voter registration. The opposition has taken an ethnic wedge strategy of portraying the ethnic communities of the president and his deputy Willian Ruto – the Kikuyus and the Kalenjins, respectively – as the only beneficiaries of the national resources during the Kenyatta first term. Mr Odinga is also seeking what is seen as his last presidential contest, his fourth, which he believes he must win to fulfil the wishes of this political family (his father having been the first vice-president of Kenya in the 1960s) and also to crown his political career, which has seen him detained for several years for political activism and plan an abortive coup in 1982. “This election will make or break me,” says Mr Odinga. Taking insurance to the rural communities The Insurance Regulatory Authority (IRA) has announced a renewed partnership with the College of Insurance to train, examine and issue certificates in the Executive Certificate of Proficiency in Insurance. The idea is to create an adequate pool of qualified insurance professionals in the rural areas, which will be tasked with public education and the sale of insurance to surpass the current penetration level of 2.93%. This is one of the initiatives that will drive the growth of insurance in 2017 and beyond. Under the partnership, the two organisations co-opt the county governments to train a certain number of insurance agents in each county and certify them. The training is also tied to a public education campaign by the IRA, conducted through roadshows and media to soften the ground for the new entrants. Having qualified agents at the county level is expected to increase uptake of insurance in the rural areas, ending the reign when insurance was seen as a service for elites only. This will be complemented by the growing number of microinsurance products, the pricing of which is competitive enough for the rural consumers. Growth in 2017 will also be aided by the domestication of marine insurance. The industry is expected to generate additional revenue of KSh17bn ($170m) in gross premium from the business in 2017, growing to $300m in the next three years. Currently, marine insurance generates annual gross premiums of $25m. The windfall has come as a result of a change in the law that requires all importers and exporters to buy marine insurance locally. Up to December 2016, 90% of marine insurance covers for goods coming into Kenya were bought in foreign countries. “We expect to see significant growth in this line of business,” says AAR managing director Caroline Munene. Insurers see more revenue going forward, as the value of Kenya’s imports is expected to rise by 28% in the next three years. “The projected surge in import volumes in coming years underscores opportunity in marine insurance for local underwriters,” says NIC Bank executive director Alan Dodd. Growing debt & drought weigh on economy Kenya’s debt appetite has been at an all-time high and the administration of President Kenyatta seeks to complete most of its election promises on the back of the national revenue, most of which ends up financing recurrent expenditure and debt servicing. Most recent data from the National Treasury shows the national debt is KSh3.6tn, which amounts to 54.8% of GDP. The level of debt rose by 27% in the past year and officials say it will increase further by the end of this financial year. The debt has been used to finance mega infrastructure projects like the 500km Mombasa-Nairobi standard gauge railway, ongoing construction of 10,000km of newly tarmacked roads, and procurement of specialist hospital equipment, among other initiatives. But political critics and lending institutions like the World Bank and the International Monetary Fund have raised concerns over the mounting debt, although officials in Kenya say there is still more room to borrow. Economist David Ndii says Kenya risks defaulting on its debt and that will have a serious consequence on its sovereign rating. “If the debt to GDP ratio gets to 57%, which it will, and the budget deficit does not come down, Kenya will be downgraded to junk status,” he says. Last month, global rating agency Fitch gave Kenya B+ with a negative outlook on its long-term foreign and local currency issuer default rating. “Kenya’s ratings are supported by its strong growth potential and resilience to shocks, favourable business climate and only moderate exposure to commodity prices. However, its ratings are constrained by its low GDP per capita, sizeable twin budget and current account deficits and rising public and external debt ratios, as well as by political risks. Kenya is starting to make headway in reducing its budget deficit, but it remains substantial and the consolidation path is subject to downside risks,” Fitch notes in a statement. But the National Treasury says the debt is manageable. “There is headroom to accumulate more without compromising economic growth,” says economic secretary Geoffrey Mwau. “The borrowing was an indication of the country’s good image, with access to sovereign bond showing that Kenya had matured economically,” he adds. The government is expected to borrow to plug the KSh691.5bn deficit in this year’s KSh2.2tn budget. So far, China is Kenya’s largest creditor, accounting for 57% of the country’s total external debt of $4.51bn, data from the government shows, with Chinese loans growing at an annual rate of 54% between 2010 and 2014. Other critics point to the inflated cost of projects, especially those being undertaken by the Chinese, to take care of the kickbacks as well as misuse of borrowed money through corruption. As debt weighs on the economy, so does the widespread drought in the country following the failure of short rains. Most of Kenya’s subsistence farmers depend on rain-fed agriculture to grow food. Pastoralists also depend on rainfall to grow silage. Food harvests expected in late December and January will not be realised, in a move expected to increase food inflation and divert some of the development funds to meeting the drought emergencies. Inflation reached 6.99% in January 2017 – a rise from 6.35% in December 2016. Food and non-alcoholic drinks went up by 1.66%, attributed to drought, says Kenya National Bureau of Statistics director general Zachary Mwangi. Analysts expect a moderate drop in the performance of the economy in 2017 as a result of the drought. “On average, we observe 0.6% decline in economic growth in years of poor rains,” says Kenneth Kaniu, CEO, Britam Asset Managers. Agriculture is the mainstay of Kenya’s economy and the highest employer. A Reuters survey report released on 23 January, based on responses from 15 analysts, notes that Kenya’s economy will grow 5.9% in 2017 and 6.1% in 2018. “Obviously, I join everyone in hoping that there is a peaceful and orderly [election] result. The vote in 2013 certainly shows that such a thing is possible,” notes Capital Economics Africa analyst John Ashbourne in that report. The Central Bank of Kenya projects the economy will grow 5.7% in 2017, slowing down from last year’s 5.9% due to the adverse effects of the prevailing drought. What will Al-Shabaab do next? Kenya is currently smarting from the first major attack in 2017 by the Kenyan troops stationed in Somalia. Mid-January, Al-Shabaab attacked a Kenyan camp near the shared border. Officials say Kenya lost six troops. This comes a year after another attack, the most devastating in the history of Kenya Defence Force, when the terrorist group attacked the army’s camp inside Somalia and killed more than 150 troops. Al-Shabaab has now concentrated its attacks near the shared border with Somalia, indicating the success of Kenya’s anti-terrorism operations to keep terrorists out of the main cities. But according to Control Risks, avoidance of attacks in main cities is a strategy rather than a sign of defeat. “This is reflective of the group’s changing strategy, which puts significantly more emphasis on gaining permanent influence and support in Muslim-populated areas of Kenya, itself a response to the growing military pressures Al-Shabaab faces around its traditional strongholds in Somalia,” notes the global risk and strategic consulting firm in a recent update. Reduced attacks, especially in the capital Nairobi and coastal city of Mombasa, helped Kenya win selection as host to a high number of global conferences in the two cities last year, which helped to increase tourism numbers and revenue. Data from the Kenya Tourism Federation shows that the country received 800,000 tourists last year, compared to 691,000 tourists in 2015. Last year’s performance is still lower than the 1.6 million tourists who last visited Kenya before the wave of Al-Shabaab attacks started, however. The coastal city of Mombasa – the beach tourism capital of Kenya, which is predominantly Muslim populated – was the hardest hit by attacks targeting tourism sites. But in January, the French Embassy in Kenya issued a note urging its citizens to visit Mombasa as the security situation had improved. “Security in Mombasa is fairly good but can be improved further,” says the French ambassador to Kenya, Antoine Sivan. Also in January, the British High Commission opened a new visa application centre in Mombasa, to offer services to customers in the coastal region. What will Trump do? The big question in Africa is what newly elected US president Donald Trump will do to the policies that have guided US-Africa relations. Kenya is a beneficiary of some of those policies, key among them being a preferential trade agreement, the African Growth Opportunities Act (AGOA). Kenya also received substantial assistance from the US for its war against Al-Shabaab and in the support of nutritional needs of people living with HIV/AIDS. Kenya’s central bank governor Patrick Njoroge says President Trump’s protectionist economic policies pose the biggest risk to Kenya’s economy in the coming year. “The economy is facing [more] serious threats externally than locally. We would struggle to cover the export hole should the Trump administration roll back AGOA. This is a risk we cannot insure,” he says. The other risk is reduced remittances, as President Trump has threatened to tighten immigration rules. Kenya received $1.7bn in remittances last year, most of them being from the US. Most recent data shows that in 2015, Kenya exported goods worth $434m to the US, of which $326m was under AGOA, according to the US Department of Commerce. In addition, AGOA is one of the major creators of job opportunities in special economic zones, art crafts, and the farming of macadamia and coffee for export to the US. In June 2015, AGOA was extended to 2025, after sustained lobbying by Africa. It covers more that 6,000 products than can be exported to the US on preferential trade terms. Dr Maina Wachira, a retired World Bank economist, also voices uncertainty over Mr Trump’s stance on Africa. “Will he abolish AGOA? The odds are that AGOA will not be changed for very pragmatic reasons,” he says. “AGOA is not a simple trade preference programme. To participate in AGOA, African countries are required to promote a market-based economy that protects private property rights; minimises government interference in the economy through such measures as price controls, subsidies and government ownership of economic assets; and makes progress toward the elimination of barriers to US trade and investment.” He says these trade and development criteria for eligibility effectively require a country to emulate key aspects of the US economy, politics and society. “It is not a forgone conclusion that the new administration in Washington will discard this multipurpose tool for interacting with Africa. Prudence suggests that AGOA countries should consult and develop a common position in the event of a move to repeal or renegotiate the programme. [But] there is reason to believe that the worst that could happen will be a renegotiation, not a repeal of AGOA,” he says. Will standard gauge railway lower cost of business? The standard gauge railway is Kenya’s single most expensive and expansive project since independence in 1963. The railway runs 500km from the Port of Mombasa to Nairobi in its first phase. The second and third phases will see the railway extend to Kampala, the capital of Uganda. The railway is expected to be an economic disruptor when it is launched in June this year. About 38,000 Kenyans are employed to work on the railway, and 30% of the materials for its construction have been sourced locally, the biggest winners being cement and steel manufacturers. The railway is expected to reduce the cost of transporting one tonne of goods per kilometre from $0.20 to $0.08. It is expected to carry 4,000 tonnes per trip once complete. The project is expected to increase Kenya’s total production capacity by at least 1.5%. Cargo uptake by rail from the Port of Mombasa is expected to increase from the current 3% to 35%. The railway will also increase cargo train speeds to 80kph and passenger trains to 120kph.

Kenya — Uncertainty ahead in 2017

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