Kenya & The Potted Frog

Ingmar Empson

February 23rd, 2018

 

Source: Trading Economics

Source: Trading Economics

Since the passing of a new constitution by referendum in 2010, Kenya’s recent political history can be read as a success story of 21st-century democratic development. Embedded with human rights and freedom of the press, the constitution has laid the groundwork for continued political and economic reform. As Kenya’s economy continues to grow at a relatively steady pace, it has emerged as a commercial, technological and logistical hub of East Africa. Cities boast relatively strong transportation infrastructure alongside young, well-educated populations. The finance sector has continued to grow, funding more local projects and small businesses, and foreign direct investment continues to expand under legislation that treats foreign and domestic investors as equals. At the same time, Kenya continues to struggle with high unemployment and poverty rates, corruption, and a slow judicial system. Perhaps most worrisome is its deeply rooted history of inter-ethnic tensions. It is for these reasons that the recent dramatic actions by President Uhuru Kenyatta to limit free speech are especially troubling.

Source: Trading Economics

Source: Trading Economics

 
President Uhuru Kenyatta

President Uhuru Kenyatta

Throughout 2017 much of the world experienced a year of tension and Kenya was no different. A historically polarizing presidential election in August split the country down a deep ethnic divide. The incumbent, President Uhuru Kenyatta is a member of the Kikuyu tribe, the son of the country’s first president (Jomo Kenyatta) and many say the face of the Kenyan wealthy elite. His biggest political rival is Raila Odinga, a member of the Luo tribe and widely perceived as a representative of the country’s growing lower and middle classes. Ironically, Odinga is one of Kenya’s wealthiest individuals with an estimated net worth of over $250 million. The August election was close, with Kenyatta ultimately winning with 54% of the vote. However, much to the winning Jubilee Party’s discomfort, Kenya’s Supreme Court nullified the election results because of discrepancies, calling for a revote in October. In an election season already defined by turbulence, the opposition party led by Odinga further muddied the water by boycotting the revote entirely. This cleared the way for Kenyatta’s second and final five-year term.

Source: Trading Economics

Source: Trading Economics

 

The year’s political uncertainty, however, looks set to continue long into the future. Roughly two weeks ago opposition leader Raila Odinga took part in an unofficial swearing-in as the “people’s president.” Not only did President Kenyatta take this news poorly, his response was erratic and a cause for deep concern. The President has since begun a systematic attack on opposition members, media and civil society. Treating the swearing-in as an attempted coup, President Kenyatta used his presidential authority to shut down three of Kenya’s largest news networks, KTN News, Nation TV and Citizen for covering the unofficial swearing-in. Kenya’s interior minister Fred Matiang’i was quick to point out that this was because the news networks were involved in “possible incitement.” Of greater concern is that President Kenyatta maintained the media blackout for six days, ignoring court rulings which held that the move was in direct violation of the country’s constitution. In addition to the media blackout, two opposition members have been charged with treason, dozens of opposition politicians have been stripped of their passports, civil society groups have been harassed and legislation has been introduced which would severely curtail the power of judicial authority. Instead of legitimizing his presidency, President Kenyatta looks intent on burning it to the ground.

 

President Kenyatta’s actions have not only sparked political outrage but have exacerbated deep ethnic tensions, a sign of more trouble to come. To quote the views of Secretary General of the governing Jubilee Party Raphael Tuju, “It is a miracle that we have survived for over 50 years without having a major breakdown of law and order.” Although many would argue there have been systemic breakdowns of law in the past half century, the point Raphael Tuju touches on is an important one. There are risks for ethnic or ethnically-tied violence running deep within Kenya to this day. Worryingly, the current administration is stoking the fire instead of looking for ways to put it out. Just two minutes later, when confronted by a reporter about the shutdown of free press, the Secretary-General proceeded to rant about how both the media and the judicial system were simply extensions of the opposition party. Therefore, he believes, it was just to ignore court proceedings and limit freedom of the press and free speech.

Source: Trading Economics

Source: Trading Economics

 

These political jitters can play out in a number of ways in the markets. In the nearer term, an advancing trend since the start of last year has been the fall of bond yields on the 10-year Kenyan treasury.  Wary of the effect of political volatility in the Kenyan equity market, investors have instead been piling into bonds, driving up prices. As long as investors remain skittish owing to political risk but maintain good faith in the Kenyan government’s ability to repay on debt, yields should continue to fall.

 

Source: Trading Economics

Source: Trading Economics

A trained eye should also be kept on the U.S. Dollar/ Kenyan Shilling in the forex market. Although the Kenyan Shilling has been depreciating hard against the USD for over a decade, some seem to believe that a falling dollar, in combination with improved inflows from overseas remittances, might prop up the Kenyan Shilling. These views seem to be heavily propagated by Kenyatta’s administration. In fact, at the time of writing the state-owned Kenyan Broadcasting Corporation has made the recent strengthening Shilling a center-story while making it near impossible to gain information about opposition leader Raila Odinga. I believe the long-term trend will hold out. Kenya’s debt to GDP has been increasing rapidly and the economy is still struggling with high unemployment rates. This may dampen growth in the long term. In the short term, political risk may negatively impact tourism which accounts for 63% of the country’s services sector.  These factors result in a 70% probability of a continued depreciation of the Kenyan Shilling over the next two years.

Source: TradingView

Source: TradingView

 

It is clear that continued political instability will have a massive effect on Kenya’s economy and the lives of its citizens. But is Kenya truly on track to a more authoritarian system? There is precedent. In 1982, then-president Daniel arap Moi responded to an attempted coup (led in part by Raila Odinga) with 20 years of violent oppression and illiberal democracy. The key indicators to watch for a repeat of history are treatment of the press and free-speech. Kenya has recently cultivated a vibrant landscape for the media and civil society. President Kenyatta’s refusal to uphold these values is a concern. Other signs registered under “creeping authoritarianism” according to Stephen Walt of Foreign Policy Magazine include: fearmongering, demonizing the opposition, enforcing the law for only one side and building a pro-regime media network. Most of these boxes already seem to be ticked. Despite these indicators, there is no guarantee Kenya will once again become an authoritarian state. The country still does possess various politically active civil society groups and an independent judiciary.  However, in these troubled times, it is difficult not to reflect on a statement made by former Nation managing editor and Kenya correspondent Karen Rothmyer: “Democracy doesn’t usually die in one calamitous moment but rather bit by bit, like the frog in the pot of ever-hotter water.” Whether it is President Kenyatta or Kenya’s democratic system that is the frog will only be fully answered in time.