Kenya: Ruto plans to strengthen medium-term public finances, but ratings drop in 2022 is imminent.

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The confirmation of William Ruto as president indicates that Kenya will remain on track with its IMF program and plans to strengthen medium-term public finances, but a sovereign credit 2022 ratings downgrade remains inevitable in the subsequent months.

  • Over the last decade, Kenya has implemented significant political and economic changes.
  • The new administration will make headway on Kenya’s fiscal consolidation.
  • Even if Ruto keeps his promises, it may be “too little, too late” to avert at least one sovereign decline by the end of 2022.

Kenya’s political and economic structure

Over the last decade, Kenya has implemented significant political and economic changes. The changes have led to sustained economic growth, social progress, and political stability. Poverty, inequality, transparency and accountability, climate change, sustained poor private sector investment, and the economy’s susceptibility to internal and external shocks remain essential development issues.

Kenya’s new constitution ushered in a new economic and political governing structure in 2010. This included a bicameral parliamentary house, devolved county administration, a constitutionally tenured judiciary and an electoral commission. In 2013, Kenya conducted the first vote under this new structure. On August 9, 2022, the second presidential election took place.

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In a unanimous decision on September 5, the supreme court dismissed a petition challenging Kenya’s presidential election. The ruling affirmed William Ruto as Kenya’s president-elect. The assumption of office committee confirmed that he would take the oath of office as Kenya’s President on September 13 2022.

According to REDD Intelligence senior credit analyst Mark Bohlund, the confirmation indicates that Kenya will remain on track with its IMF program. Still, a sovereign credit rating fall is inevitable in the subsequent months.

According to Bohlund, Kenya’s external funding demand would grow to $8.9 billion this year from $7.9 billion in 2021, stay essentially stable in 2023, and then soar to $11.1 billion and $10.9 billion in 2024 and 2025, respectively.

Kenya agreed to a 38-month $2.34 billion IMF loan in April 2020, distributed in tranches. The next President has promised to reduce debt and raise tax income.

Even if Ruto keeps his promises to strengthen medium-term public finances, it may be “too little, too late” to avert at least one sovereign decline by the end of 2022. With a stable outlook, S&P Global rates Kenya “B”, and the budget deficit is expected to shrink to 5.7% on average between 2023 and 2025.

The role of parliament in medium-term public finances and credit ratings

The new administration will make headway on Kenya’s fiscal consolidation. However, fiscal deficits will stay high as the tax revenue/GDP ratio remains below pre-Covid-19 pandemic levels, according to Fitch. Moreover, Policy uncertainty caused by a split parliament might jeopardise fiscal reduction efforts.

A thin parliamentary majority will make it harder to adopt a consistent policy. The majority of 17 is not enough to govern reliably, according to Charles Hornsby, an author and researcher on Kenya who is a chief information security officer at the UN refugee agency UNHCR.

The incoming President should work on a strategy that minimises the possibility of politics playing out in the national assembly. The President should work on a formula to ensure the majority of parliamentarians get on board concerning his fiscal policy approach and stance on foreign borrowing.

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World Bank projections on medium-term public finances

While aiding political stability, Kenya’s devolved government structure also adds to the country’s financial difficulties. According to Bohlund, the devolution established by the 2010 constitution has contributed 3% of GDP to Kenya’s debt-financed recurrent expenditure.

This recurrent expenditure is obviously not sustainable. However, the government agrees to fund it via income collected centrally or county governments’ revenue.

Nonetheless, according to Bohlund, “it can be argued that Kenya has more of a liquidity problem than a solvency crisis,” and hence is in a much better situation than Ghana.

The World Bank’s subsequent evaluations will provide an indication of Ruto’s leeway. This month, the World Bank will publish its Comprehensive Policy and Institutional Assessment (CPIA) and Worldwide Governance Indicators (WGI) ratings for Kenya.

The CPIA evaluates the government’s ability to utilise World Bank funding to achieve Sustainable Development Goals. The CPIA helps to assess how much concessional financing the World Bank and other development partners are prepared to provide to developing nations.

Kenya has consistently had one of the most substantial CPIA ratings in Sub-Saharan Africa during the previous two decades. The WGI scores impact credit ratings provided by agencies. They examine accountability, political stability and the lack of violence, government performance, regulatory excellence, the rule of law, and corruption prevention.

Political stability is key to strengthening public finance

Kenya’s performance in WGI ratings has been worse than in CPIA ratings due to post-election political violence, notably in 2007-2008. The WGI ranking will likely improve this month since this year’s election has happened in a largely stable political environment. Moreover, everything points toward the political transition happening smoothly.

Kenya is now on the verge of transformation. The nation has challenges of corruption and, more recently, the rising cost of living and a high debt-to-GDP ratio. Nevertheless, the nation has had ten years of consistent leadership. However, these are issues that can be addressed via careful planning and execution of programs that promote trade, job creation, and investment.

That is why the next administration’s business policies will be critical to alleviating the population’s issues. Fortunately, the leaving administration has laid the groundwork for the future administration to build on and lead Kenya to success.

However, as the previous decade has shown, peace is the key to stability. As Kenya prepares for change, it is vital that the nation controls the transition to ensure peace and stability.

This will need political maturity. The voters who have shown maturity via their patience throughout the election process might teach leaders an important lesson. Leaders do not have to reinvent the wheel. All they need to do is listen to the people. Peace in stability will indeed play a crucial role in Ruto’s plan to strengthen medium-term public finances.

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I am a writer based in Kenya with vast knowledge in Business, Economics, Blockchain, Law and Environmental Conservation.

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