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Kenya

Kenya: Government split in the open as finance minister arrested

  • Finance Minister Henry Rotich has been arrested on corruption charges

  • Should be viewed through the lens of divisions within ruling Jubilee coalition than an invigorated anti-corruption drive

  • A divided government is a problem and investors should worry that this arrest is a reflection of that division

Kenya: Government split in the open as finance minister arrested
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
22 July 2019
Published by

Today’s arrest of Finance Minister, Henry Rotich, in corruption charges related to alleged inflated contract awards for public dam projects, should be viewed through the lens of divisions within the ruling Jubilee coalition rather than an invigorated anti-corruption drive. Kenyan growth is currently reliant on effective public project spending because of the lending rate cap (which is throttling private sector credit growth). A divided government is a problem in this context and investors should worry that this arrest is a reflection of that division.

The Jubilee coalition is openly divided along ethnic lines between Kikuyu supporters of President Uhuru Kenyatta and Kalenjin supporters of Vice President William Ruto. Rotich hails from the Kalenjin community. The Kikuyu component would prefer to avoid the transfer of executive presidential power to Ruto in the next election in 2022, either by weakening his allies in government, pursuing constitutional reform in favour of a more Parliamentary system or openly aligning with other ethnic communities (eg those belonging to the former opposition bloc NASA or its predecessor CORD and led by the likes of Raila Odinga).

The likely impact of this split within the ruling party is that public project spending will suffer delays, sensible policy decisions (such as the repeal of the lending rate cap) will take longer to muster majority legislative support and local investor confidence (private sector capex) will be dented. Ultimately, Kenya macroeconomic growth forecasts will likely come under further pressure.

Although Kenya equities are not expensive, there are twin deficits and the FX rate is over-valued and potentially vulnerable should there be any hit to international investor confidence. We have argued before that although Kenya has enjoyed immunity from various investment risks in the past (widening twin deficits, expensive FX rate, IMF standby facility lapse, low bank provisioning relative to loan growth, drought, Safaricom’s maturing growth, political uncertainty, over-supply in Nairobi real estate), the current political divisions come at a time when macroeconomic growth forecasts are already under pressure and are more reliant on well executed public project spending. 

See our last report on this topic from May 2019: Kenya: Ruling coalition divided, another risk

From a pan-Africa Equity strategy context, we prefer equities in Egypt (value and growth) and Nigeria (deep value).