Kenya’s dilemma: Economic risks of prolonged political instability

WITH Kenya’s National Assembly and Senate approving the Deputy President’s impeachment, the case now moves to the judiciary, highlighting key issues around judicial independence, constitutional interpretation and political stability.

Known for its independence since the 2010 Constitution, the judiciary must assess if the impeachment adhered to constitutional standards while balancing oversight with parliamentary independence.

The Deputy President’s legal team is likely to challenge the process on procedural grounds, potentially claiming political motivation.

A ruling in favour of the Deputy President could set a stricter precedent for future impeachments, reinforcing due process, while upholding the impeachment could affirm the judiciary’s role as a check on executive power.

Economic case studies from countries like Brazil and South Korea show that similar political instability and judicial involvement often affect FDI, market stability and government spending—outcomes Kenya could face depending on how this high-profile review unfolds.

Brazil Study

The 2016 impeachment of Brazilian President Dilma Rousseff triggered substantial economic fallout, with Brazil’s Bovespa index dropping 20 per cent in the lead-up to her removal and the Brazilian real depreciating by 15 per cent against the US dollar.

FDI inflows declined by 12 per cent compared to the previous year, while credit rating downgrades to junk status raised government bond spreads by nearly 400 basis points, increasing borrowing costs.

The GDP contracted by 3.3 per cent and Brazil’s fiscal deficit reached 9 per cent of GDP as government spending increased to stabilise the economy, while inflation surged to 10.7 per cent amid currency devaluation.

For Kenya, prolonged judicial review of the Deputy President’s impeachment could lead to similar economic strains, including reduced FDI, currency depreciation and heightened market volatility.

South Korea’s Study

In 2017, South Korea’s impeachment of President Park Geun-hye due to corruption allegations led to shortterm economic disruptions.

FDI inflows dropped by 8.0 per cent as foreign investors paused new investments, while the KOSPI index saw temporary volatility, falling 3.5 per cent during the peak of the political turmoil.

The Korean won depreciated by roughly 5.0 per cent against the US dollar amid investor caution and currency fluctuations. Despite these impacts, South Korea’s strong institutions and judicial independence reassured investors, facilitating a swift market recovery after Park’s removal, with the KOSPI rebounding by 6.0 per cent within months.

The South Korean experience underscores how a credible judiciary can stabilise investor confidence. Kenya could similarly mitigate economic risks through a transparent judicial review, helping maintain FDI, market stability and currency strength amid political challenges.

Zimbabwe’s Study

The 2017 resignation of Zimbabwe’s President Robert Mugabe after a military intervention led to severe economic instability.

The Zimbabwean dollar depreciated sharply, contributing to hyperinflation that reached 500 per cent within months. FDI inflows dropped by an estimated 18 per cent as foreign investors pulled back, concerned about policy unpredictability.

Zimbabwe’s credit rating was downgraded by Fitch from CCC to CC, raising borrowing costs by an average of 600 basis points, further straining fiscal resources. GDP growth plummeted from 4.7 per cent in 2016 to 2.9 per cent in 2017 as political uncertainty deepened.

For Kenya, Zimbabwe’s experience underscores the risks of currency depreciation, inflation spikes and credit downgrades if judicial review of the Deputy President’s impeachment leads to prolonged uncertainty, potentially eroding investor confidence and economic stability.

Thailand’s Study

In 2014, Thailand’s political crisis, following Prime Minister Yingluck Shinawatra’s removal by the Constitutional Court, led to economic instability and a 6.0 per cent depreciation of the baht as foreign capital outflows surged. FDI inflows fell by approximately 11.7 per cent, reflecting investor hesitancy amid the military’s subsequent takeover.

Key sectors such as tourism and manufacturing, which together contribute around 32 per cent of Thailand’s GDP, suffered revenue drops, with tourism alone declining by 8 per cent due to reduced foreign arrivals. Government spending rose by 9.0 per cent as resources were allocated to manage the unrest and Thailand’s sovereign bond yields increased by 220 basis points, indicating higher borrowing costs due to increased risk perception.

This case illustrates the economic risks associated with judicial interventions in political matters. For Kenya, the judicial review of the Deputy President’s impeachment could have similar impacts, including currency volatility, reduced FDI and potential strain on sectors like tourism and agriculture, while increased spending to manage political uncertainty may pressure fiscal resources and elevate borrowing costs.

Ukraine’s Study

The 2014 political upheaval in Ukraine following President Viktor Yanukovych’s ousting triggered severe economic disruptions. FDI inflows plummeted by 33 per cent, with foreign investors retreating amid political and military tensions.

The Ukrainian hryvnia lost over 50 per cent of its value against the US dollar, contributing to inflation rates that soared to 24.9 per cent, which severely strained household and business spending. Ukraine’s credit rating was downgraded from B- to CCC by Standard & Poor’s thus increasing borrowing costs by 800 basis points as risk premiums soared while government bond yields surged by 900 basis points, reflecting heightened risk perceptions and sharply raising borrowing costs.

This case highlights how political instability at high executive levels can lead to rapid economic decline, with steep currency devaluation, reduced foreign investment and elevated borrowing costs.

For Kenya, the Ukrainian experience underscores the need for a swift and transparent judicial process to avoid prolonged instability that could trigger similar financial pressures, including FDI declines, currency volatility and inflationary impacts on the economy. In examining the economic fallout from similar political upheavals worldwide, Kenya faces significant risks if the Deputy President’s impeachment process becomes protracted or contentious.

The experiences of Brazil, South Korea, Zimbabwe, Thailand and Ukraine underscore the economic costs of high-level political instability, where foreign investment sharply declines, currencies weaken, inflation spikes and government borrowing costs escalate. Kenya’s own sectors—particularly tourism, agriculture and manufacturing—could suffer reduced investment and volatile market performance if political uncertainty takes hold.

As Kenya navigates this pivotal moment, the importance of a swift, fair and transparent judicial process cannot be overstated. Citizens, business leaders and policymakers alike must advocate for stability and integrity in governance to safeguard Kenya’s economy and future.

By holding their institutions to high standards and ensuring that political transitions are handled with transparency, Kenyan’s economy can protect the livelihoods of millions, foster investor confidence and pave the way for sustainable growth.