What does Kenya’s election mean for capital markets?

Kenya, the leading economy in eastern Africa, has elected a new president. The election itself was a watershed moment for the country and the region at large. So how will it affect the country’s financial markets?

Capital News Africa: From the Trading Floor – Week 34-2022

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In mid-August, Kenyans went to the polls to elect a new president in an election that, in many respects, was a watershed moment for the country and all of eastern Africa. Consider that:

  1. The former incumbent, Uhuru Kenyatta, was barred by the Kenyan constitution to run again after serving two terms. Kenyatta’s decision to not challenge this marked a victory for democracy.
  2. For the first time, the two candidates running were not doing so on behalf of a certain ethnic group. Kenya is home to 55 million people who identify with more than 40 ethnic groups. Kikuyu form the biggest one, and until now, no Kenyan president was able to rule without its support. But the election’s outcome was not, for the first time ever, decided along ethnic lines.
  3. The result was very close: The former vice president, William Ruto, won with just 50.49% of the votes cast. He narrowly defeated Raila Odinga, who had run for the presidency for the fifth time. Despite there being just a few thousand votes separating Ruto and Odinga, Kenya was spared conflict between the two camps.
  4. Even so, Odinga has challenged the election result in the courts. That is his right under the democratic laws of Kenya. It is unclear whether the judges will decide in his favour. But we expect that both, Ruto and Odinga, will accept the judges’ verdict.
  5. Kenya’s financial markets reacted positively to the election result. Ahead of the contest, the relevant stock index for Nairobi’s bourse, the NSE 20, had dropped to a year low of 1564 points. As of August 17, however, the index had rebounded to 1793 points and stands now at 1770 points.

These facts reflect that Kenyan democracy is a big winner in the election. Kenya has strengthened its political institutions and thereby proven its political stability. That is very beneficial for its capital markets. Kenya’s fair election also sends an important signal to the entire region of eastern Africa. This is because Kenya is the region’s leading economy as measured by its population, economic strength as well as Mombasa, the biggest port in the region.

Who were the candidates?

Regarding the two presidential candidates, there was little in terms of policy that separated them. In the campaign, Ruto was more the populist candidate, taking a „man-of-the-people“ approach. He half-jokingly called himself a “hustler-in-chief” and stressed his humble beginnings as a chicken seller.

During his climb to the top of Kenyan politics, Ruto earned bachelor degrees in botany and zoology from the University of Nairobi in 1990; then a master’s degree in plant ecology in 2011; and finally, a PhD seven years later. The 55-year-old Ruto appealed more to Kenya’s younger generation.

The 77-year-old Odinga was the establishment candidate. Indeed, former President Uhuru Kenyatta supported him in the election instead of his vice-president Ruto. Kenyatta and Odinga have known each other since childhood. Odinga's father Jaramogi Oginga Odinga served as vice president under Jomo Kenyatta, Kenya’s first president after it gaining independence from the UK. Jomo Kenyatta is Uhuru’s father. Odinga is also known in Germany, having studied at the universities for Leipzig and Magdeburg in the former communist east Germany.

Exploding debt, but good economic prospects

Ruto’s job will not be easy, as he must deal with the consequences of the huge debt that Kenya incurred during Kenyatta’s presidency. When the latter was elected to office in 2013, Kenya’s debt-to-GDP ratio stood at 44.5%. Since then, it has exploded to 70.3%. Moreover, Kenya’s debt service to revenue ratio for the financial year 2020/2021 stands at 50%. That is far too high.

Even so, the economic outlook for Kenya is good considering that it has a robust economy, a well-developed SME sector and diversified industries. The International Monetary Funds (IMF) expects Kenyan GDP to expand by 5.5% this year and by 5% next year. While these are impressive figures, they are below the 7.5% growth in GDP seen last year. Analysts attribute the expected decline to higher import prices, especially for oil.

Ruto should promote capital markets

We feel that in order to realise even more of Kenya’s economic potential, President Ruto should do more to promote capital markets. This could include measures to strengthen the Nairobi bourse as well as more initial public offerings (IPOs). Such measures would be key to financing further growth of Kenyan companies.

To cite an example: Trading in shares of Kenya Airways should resume under Ruto after they were suspended two years ago amid the onset of the Corona crisis. This can be easily done, as the former government thankfully dropped plans to re-nationalise Kenya Airways.