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Markets Tense Up as Justice Rules Kenyan Election Void

The Supreme Court decision to invalidate the results of Kenya's 8 August election has been hailed as an impressive victory for democracy in Africa. But as the candidates gear up for a new poll, risks of potential public discontent and even a constitutional crisis pose difficult questions for regulators and the markets alike.

Sep 22, 2017 // 12:11PM

Even as opposition outcries intensified over alleged flaws in the tallying process after President Uhuru Kenyatta won 1.4 million more votes than his opponent Raila Odinga, few had anticipated that the Supreme Court will find sufficient evidence and, more importantly, be bold enough to overturn the result.

Chief Justice David Maraga’s ruling thus came as a major surprise, raising hopes that a free and fair election can still be held, but creating a great deal of uncertainty for one of Africa’s most successful economies in the process. How will the irregularities be eliminated? What does the ruling signal for local and gubernatorial elections? Who should be the judges and decisionmakers in that process? And, how will the markets respond to the ongoing confusion?

While Kenya’s incumbent leader initially appeared to accept the Supreme Court’s decision, things quickly turned sour as he blasted the “crooks” in the court and accused the Chief Justice of “thuggery”. Meanwhile, the opposition, a five-party National Super Alliance, urged the Independent Electoral & Boundaries Commission to remove six key officials from its secretariat, including Chief Executive Officer Ezra Chiloba, whom it blames for allowing the alleged irregularities to occur, before a new vote is held on 17 October.

This development pits Chiloba against Wafula Chebukati, commission chairman, and his supporters, complicating the issue further. In early September, Chebukati appointed six people to oversee the repeat election, in effect bypassing Mr Chiloba and prompting a backlash from the commission’s supporters and both presidential challengers, both of whom said they had reservations about the team’s neutrality.

Even if the vote was “hacked”, as the opposition has claimed, leading to voter tallies being altered, and even if concrete evidence of these irregularities is made public (which the court is yet to do), questions arise over how exactly the regulators and the commission intend to make sure the re-election goes smoothly and without interference. With just weeks to go and continued infighting within the electoral commission, along with the opposition’s vow to boycott the re-run if their terms aren’t met, time is of the essence.

“From my perspective, the immediate issue is whether they will go ahead with the revised election timing, which is unclear given Odinga’s stance,” noted Stuart Culverhouse, Executive Director and Head of Fixed Income Research at Exotix, an investment bank. “IEBC has had months to prepare for the elections, and in the end, they weren’t credible – how are they going to improve things in just a matter of weeks?”

Whichever way the eventual re-run results go, it would be essential – but for now appears unlikely – for all parties to accept the outcome, as prolonging the uncertainty will not only further worsen market sentiment, but, worryingly, could lead to clashes between different sides’ supporters, with the 2007 post-election violence still fresh in the country’s collective memory.

Another concern is the cost of holding new elections, which according to some estimates, will amount to additional USD117mn. That is on top of the nearly USD500mn spent on organizing the 8 August vote, which went towards running the electoral commission, hiring personnel, procuring election materials, as well as collecting and transmitting the results of votes for the presidency.

For a country desperately seeking to trim its ballooning fiscal deficit, these kinds of unnecessary expenses could prove painful. It is also questionable how enthusiastic the electorate will be about going to the polls again, although for now observers on the ground are seeing largely positive sentiment, with citizens appearing to be eager to cast their vote for the second time in months.

Overleveraging Still a Concern

Currently for a planned budget of KSH2.29tn (US2.22bn) the East African country is facing a deficit of about KSH524.6bn, with the treasury planning to bridge the gap through KSH268.6bn in domestic and KSH256bn in foreign borrowing. This will take a toll on the country’s debt burden, which is already at worrying levels. According to Standard & Poor (S&P), Kenya’s rising public debt is the biggest economic risk for the country, after hitting 54.4% of GDP in Q12017.

“I think the overall persistent fiscal deficit has been a big concern for Kenya for several years,” said Culverhouse. “But with yields at 6% even with this uncertainty and overleveraging, the market isn’t that bothered. It would be positive if whoever wins got a better grip on the fiscal situation.”

So far though, barring some knee-jerk dumping of Kenyan assets and tremors among bond traders, the market reaction has been rather muted. In the run-up to the court’s decision the yields on the 91-day paper declined to 8.1% from 8.2% at the end of August, whereas yields on the 182 and 364-day papers remained unchanged at 10.3% and 10.9%, respectively.

After the court’s ruling, the shilling and the FTSE NSE Kenya 25 Index of stocks have weakened somewhat, while yields on the nation’s foreign debt edged up.

On the 2024-year Eurobonds, we saw yields easing a bit before the elections, coming in to 6.5%, suggesting no one was too concerned about potential unrest following the elections. Following the results, the bonds rallied and got below 6%. Since the annulment they’ve retrenched slightly, about 20bp.

Considering the drivers behind these shifts, the investment analyst surmised that it was partly to do with the country’s strong fundamentals, but underlined that politics still matters.

“At this stage investors either don’t understand the implications, or assume that things will work themselves out irrespective of this development. There is some element of uncertainty, though, so I wouldn’t be surprised if yields widen a bit more from here. If the next election goes smoothly, the rally will probably resume; if we see delays or contested results, then it could become more challenging.”

Jan Mikkelsen, the IMF’s new resident representative in Kenya, agreed that any displacements in the market appear to be temporary and not based on any long-term concerns.

The initial surprise of the re-election announcement was reflected in a knee-jerk stock market reaction – prompting the Nairobi Stock Exchange to briefly halt trading on the day of the Supreme Court annulment announcement – and the FX rate, but both recovered fairly quickly, and there was no need for much intervention by the authorities.

He admitted that at this stage it is hard to predict how the markets will react to the re-run, but noted that they “appear to be more concerned about the prolonged uncertainty and the noise around the election process than about the actual outcome. Those short-term negative shifts can be overcome quite quickly and they can get back on track towards their economic goals.”

Looking at the domestic fixed-income space, earlier this month Kenya’s Central Bank invited bids for a five-year Treasury bond worth KES13bn (USD126mn) in a tap sale. The bank said in a statement the bond will have an average yield rate and coupon of 12.47%, after the weighted average yield on the bond fell from 12.5% from the last sale of a five-year bond in June.

Cytonn reported that the T-bills were largely unaffected by the political disruption. Overall subscription rates on the treasury notes came in at 153.5%, compared to 136.1% recorded the previous week due to increased liquidity in the money market, and subscription rates rose across the board. Yields on the 91, 182 and 364-day papers remained unchanged from the previous week at 8.1%, 10.3% and 10.9%, respectively.

The country plans to sell up to KES30bn (approx. USD292mn) in 2-year and 10-year treasury bonds later this month, according to the Central Bank. The Bank said it would be open to receiving bids on the notes on 19 September, with an auction due to take place 20 September. The new 2-year notes will have a coupon set at auction, while the 10-year re-tap will pay a coupon of 12.966%, the Central Bank said.

As the Cytonn report noted, the government was still behind its domestic borrowing target for the current fiscal year, having borrowed KSH18.4bn, against a target of KSH61.1bn.

“But we expect the government to meet its domestic borrowing target for the fiscal year, as banks and institutions channel funds more actively towards government securities following the capping of interest rates,” Cytonn concluded.

The immediate steps for the country, then, are clear: the new election needs to be conducted smoothly, professionally and with approval from all sides. When that is done, said Mikkelsen, the government needs to focus on the budget and medium-term plans, making sure that they put forward a sustainable funding programme that includes new investment in infrastructure and provides the right pace for implementing those projects and targets. 

“Closing some of these infrastructure gaps is essential for boosting growth, but the pacing is crucial, so as not to increase the debt burden, which is already quite high,” the IMF representative noted.

Africa Macro Policy & Government CEEMEA

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