Fitch: Kenya Post-Election Disruption Limited So Far

The Kenyan opposition’s decision to seek a legal resolution after it disputed this month’s general election result has helped reduce the risk that tensions may escalate, Fitch Ratings says. Pursuing legal action rather than focusing on popular protests has helped contain the social unrest sparked by the result, which saw violent clashes and some fatalities in parts of Nairobi and western Kenya. While it is still possible that any court decision to reject the challenge could trigger new unrest, we believe that the election will not result in any significant deterioration in investor or economic sentiment toward the country.

The National Super Alliance (NASA), the main opposition group led by Raila Odinga, filed a petition in the Supreme Court on 18 August alleging hacking of the electronic vote-counting system used in the 8 August election. The election board had said that incumbent Uhuru Kenyatta had won another five-year term as president after securing 54% of the popular vote.

NASA’s petition lists numerous alleged irregularities at polling stations and asks the Supreme Court to nullify the election results. By law, the court must issue a ruling by 1 September. Odinga also challenged Kenyatta’s victory in the 2013 presidential election, and accepted the Supreme Court’s ruling that upheld the result, helping to defuse tensions.

Renewed disturbances cannot be ruled out (Odinga said that the opposition will “uphold our right to assemble and protest”). However, developments so far are in line with the agency’s baseline assumption that the elections would cause limited disruption, but not be a repeat of the upsurge in ethnic violence that followed the December 2007 presidential election.

If the dispute is resolved through the courts, or if the tensions over the election outcome dissipate for other reasons, their sovereign credit analysis will focus on economic and fiscal policy and outturns.

Kenya’s public finances have deteriorated steadily since 2008, through weak revenue performance, increasing infrastructure spending and persistently high current expenditure. This is reflected in the Negative Outlook on Kenya’s ‘B+’ sovereign rating, which we affirmed in July. If the aftermath of the election were to lead to a major deterioration in the political or security environment that undermines Kenya’s growth performance, it would add to pressures on the rating.

Fiscal consolidation has yet to start in earnest, although the FY17/18 budget presented before the election plans to shrink the deficit and prioritise public debt sustainability. Fitch forecasts the fiscal deficit to narrow to 6.4% of GDP from 8.4%, as expenditure falls closer to average historical levels and improvements to revenue administration and collection begin to show results.

Risks to forecast include slower-than-expected growth and lower revenue collection. Fitch forecasts GDP growth to slow to 5.4% in 2017 from the 5.8% last year. GDP growth in the first quarter fell to 4.7%, as the agricultural sector contracted 1.1% due to drought, while slower credit growth and uncertainty around the elections have also weighed on activity this year.

Failure to consolidate the budget deficit and stabilise government debt/GDP would be negative for Kenya’s credit profile, while effective implementation of a fiscal consolidation plan and stabilisation of government debt/GDP could lead to a positive rating action.