(Bloomberg) -- In May, Kenyan President William Ruto was dining at the White House, the first African leader to be treated to a state dinner in a decade and a half — a measure of his stature as one of the continent’s most preeminent leaders.
Since then he’s presided over a brutal police crackdown on anti-tax protests that left at least 41 dead, withdrew a signature tax law that authorities argued would steady Kenya’s shaky government finances and seen Moody’s Ratings downgrade the nation’s debt. On Thursday, Ruto took the drastic step of firing almost all the members of his cabinet in a bid to address public anger over its performance.
“He had dreams of grandeur, he came to office with a determination to be popular globally and a spokesperson for Africa. He got the praise he wanted,” said Macharia Munene, a professor of international relations at the United States International University in Nairobi. “Things were going haywire at home but he wasn’t listening. Things were piling up, everything was going wrong domestically.”
Now Ruto has to tackle Kenya’s massive debt load, which stood at 10.4 trillion shillings ($80.5 billion) at the end of March, fill a $2.7 billion fiscal hole and rebuild trust with citizens disillusioned with his top-down style of governance. While frustration had been building for more than a year over a slew of taxes Ruto had previously introduced, the unrest triggered by the proposed additional levies caught the government by surprise.
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“They lost the Kenyan heartbeat,” Dismas Mokua, a political analyst, said in a phone interview. “He should be citizen-centric: listen to the public, manage public expectations, he needs to listen. He has to come up with a plan to rebuild trust and confidence.”
Amid the fiscal squeeze, Ruto also needs to find a way to help his countrymen cope with surging living costs and create economic opportunities for the two-thirds of young people who are unemployed.
Moody’s this week downgraded Kenya’s rating one notch to Caa1, or seven levels into junk — a direct result of the withdrawal of a law that would have taxed everything from bread to diapers. The rating change “reflects significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend,” it said in a statement.
Ruto’s decision to dissolve the cabinet — one of the protesters’ main demands — was met with skepticism by markets. Yields on Kenya’s eurobonds due in 2031 dropped six basis points to 10.41% by close of trading Thursday. The Kenyan shilling closed at its lowest in two weeks.
“Investors care as far as it cools down protests and allows them to re-focus on dealing with fiscal issues now that revenue-raising measures have been shelved,” said Thys Louw, a portfolio manager at Ninety One UK Ltd..
A revised budget that includes spending cuts on non-essential expenditure like travel and hospitality is due to be presented to lawmakers when the National Assembly resumes on July 23. It will also include additional borrowing that will see the fiscal deficit widen to 4.6% of gross domestic product in the period through June 2025, from an earlier estimate of 3.3%.
While the International Monetary Fund is likely to be sympathetic to the backlash in Kenya, conversations with authorities “will still be centered around ensuring a fiscal consolidation path — albeit tempered — to ensure debt remains on a sustainable path,” said Sthembiso Nkalanga, an economist at JPMorgan Chase & Co.
“A further extension of the program could yet be on the table,” Nkalanga said. The IMF is due to hold a board meeting to approve Kenya’s seventh review of an ongoing $3.6 billion program due to end in March 2025.
Ruto’s fiscal plans were dealt another blow on Monday, when a Kenyan court blocked his plan to carry out a forensic audit of the nation’s public debt, after two petitioners challenged the plan as unconstitutional.
Ruto on Thursday said he will hold a “national dialog” next week, and seek to build a “broad-based government,” that may involve reaching out to an opposition that already smells blood.
Ruto, once on top of the world, is now fighting for his political survival, said Charles Kanjama, a constitutional lawyer in Nairobi.
The president is “taking action to try and recover his political popularity to show that he is listening to Kenyans,” said Kanjama, who sees a strong likelihood that the youth will continue their protests. “For as long as they find they are making more and more progress, they will keep pushing,” Kanjama said.
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--With assistance from Colleen Goko and Bella Genga.
©2024 Bloomberg L.P.
