Monday, August 28, 2017 12:55 PM / BMI
BMI View: The squeeze on living standards in Kenya will see Raila Odinga and his National Super Alliance go into the country's August general election with a strengthened position, paving the way for a tighter election than we initially expected. While President Kenyatta and his Jubilee coalition are still likely to win, a closer result threatens an increase in violence over the short term as well as obstacles to policy making.
A close result in Kenya's general election in August increases the risks posed to political stability by social unrest and policy making. Our core view remains that President Uhuru Kenyatta and the Jubilee coalition will win the presidency and gain the most seats in the country's National Assembly, but we highlight that the squeeze on living standards in the months before the election will favour opposition candidates.
With increasing potential for a close result, particularly in the presidential race, we see a greater chance that the opposition will consider rejecting a Kenyatta and Jubilee victory and that this will be an obstacle to policy formation in the years that follow the election.
A difficult policy-making environment following the election had already been largely factored into Kenya's score in our proprietary Short-Term Political Risk Index, but these increasing risks have led us to make a modest downward revision in the 'policymaking process' pillar of the index, from 53.3 to 46.7 out of 100.
Rising Prices Add Tailwinds To NASA Campaign
Opposition candidate Raila Odinga and his National Super Alliance (NASA) are benefiting from the increase in inflation that has hit consumers across the country in 2017. An ongoing food shortage in East Africa has seen supermarket shelves go empty and inflation climb to 11.5% y-o-y in April, the highest since 2012.
We believe the impact this has had on the population's disposable income will play into the hands of an opposition that has campaigned largely on populist rhetoric. Thus far, NASA has not offered a detailed manifesto, only an executive summary that promises large increases in recurrent spending, including rent control, free primary and secondary education and lower income taxes.
Kenyatta's Jubilee coalition is also yet to release a detailed manifesto, but we believe the two parties' positions on spending will differ substantially. Having spent heavily in the months leading up to the vote, including significant increases in public sector salaries and the minimum wage, we believe Jubilee will look to restrain recurrent expenditure after the election in a bid to control the government's growing debt burden (see 'Growing Risks Will Be Tackled In Long-Term Fiscal Recovery', June 9 2017).
Reliable opinion polls are few and far between in Kenya, but we believe this policy divergence will favour NASA going into the election, forcing the presidential race into a second-round runoff and winning a sizeable minority of seats in country's National Assembly.
Risks Of Violence Remain High
Although the threat of election-related violence has long been on our radar in Kenya, a close result undoubtedly increases this risk. Raila Odinga has fought and lost three previous elections as a presidential candidate and has a history of questioning the result when it fails to go his way. Indeed, Odinga has repeatedly called into question the impartiality of Kenya's Independent Electoral and Boundaries Commission over the past year and has announced his intention to declare his own election result if he deems the official result unfair.
We believe a close result in the presidential race will increase the likelihood of a contested result. In previous years, a close result has led to outbreaks of violence, particularly in 2007 and 2008 when over 1,000 people were killed in election-related violence. While we do not expect violence on this scale in 2017, we would be surprised to see the election pass entirely peacefully. Although any violence would likely only be temporary, it would nonetheless risk disruption to supply chains, particularly for those businesses located around urban centres.
Policy Blockage Poses Greater Risk
In addition to the threat of violence, a bigger risk to Kenya's economic outlook is posed by the possibility of slower policy formation if NASA wins a large portion of seats. Given that NASA's platform is based on offering the public a number of handouts, we could see newly elected members of the assembly vote against the more austere budgets we would expect from a Kenyatta government in its second term in office.
Without an actual majority, there is probably little NASA could do to actually block government legislation entirely, but Kenyatta will likely have more difficulty passing policy through the country's National Assembly if he lacks a commanding majority.
Any indication that the government is struggling to move fiscal policy in a more disciplined direction will likely unnerve investors who have become increasingly concerned with the size of the public debt burden. We forecast government debt to reach 56.8% of GDP in 2017, up from 44.6% in 2014 after progressing with an ambitious programme of infrastructure development. We believe Kenya's ability to attract foreign investment into its economy over the coming years will be largely reliant on the pace of future government spending.
Any indication that the new government is unable to move the national debt from its current negative trajectory would force us to revise down our forecasts for the country's key economic indicators.
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