Event

The drought that is impacting the countries in the horn of Africa also affects the North of Kenya. This is impacting 2.6 million people in almost half of Kenya’s 47 counties in what is considered the worst drought in Kenya since 2011. Herders driving their herds onto private farmland in search of pasturing have revived historical tensions with farmers. This has led to deathly clashes between herders and farmers in recent weeks. The government responded in February by declaring a national disaster and sending extra police and paramilitary forces to the region in order to quell the unrest. The drought is increasing political unrest in the run-up to the August 2017 presidential elections.

Impact on country risk

Kenya has a strong economy that has been growing by 5% on average in the last ten years and is performing better than most other Sub-Saharan African countries. In 2016, the economy grew by 6% with a strong expansion in the construction and electricity sector and a recovery in tourism being the main growth drivers. One of the Kenyan economy’s strengths is that it is a relatively diversified economy that does not rely on the exports of resources, whereas most other Sub-Sahara countries do. This has made it less vulnerable to reductions of commodity prices. The country is, however, facing a number of challenges. The economy has been running a structural twin deficit since 2006. In the fiscal year (FY) 2016 (ending in July 2016), the budget deficit was at 7% of GDP, largely due to a rapid growth in infrastructure spending. Under the recent IMF programme, it is foreseen for the fiscal deficit to be reduced step by step towards 3% by FY 2020, which is in line with the East African Monetary Union’s deficit ceiling. Since it needs to make available emergency funding to deal with the drought, the government is less likely to reach its deficit target this year. As for Kenya’s external accounts, the drought risks worsening the current account deficit in the short term through its negative impact on tea and horticulture output, two sectors accounting together for almost 15% of current account receipts. The current account deficit had narrowed in 2016 to 5.9% of GDP down from 11.4% in 2014 due to the low oil prices and lower investment-related imports. Still, the drought effect on the current account might be mitigated by robust private transfers and further recovery in tourism. Tourism is indeed expected to recover further as a result of the improved security situation. Besides the twin deficit, Kenya is faced with other downside risks such as volatility of capital flows, vulnerabilities in the banking system, uncertainty about FDI in oil and gas exploration, the build-up of non-public external debt, security challenges and increasing political unrest as the August 2017 presidential elections approach. These factors continue to impede the MLT political risk which is currently in category 5.

Analyst: Jan-Pieter Laleman, jp.laleman@credendo.com