The markets hate uncertainty, and Kenya is now swimming in it. Four protesters are dead in Nairobi after demonstrations against soaring fuel prices escalated into a full-blown confrontation with police. The streets of the capital have become a theatre of rage, and the FTSE 100 barely blinked. Let's be clear: this is not just a tragedy. It is a fiscal warning shot.
Kenya has been running a budget deficit that would make a Greek minister blush. To plug the gap, the government hiked fuel taxes by 16% last month, a predictably unpopular move. The International Monetary Fund, ever the stern headmaster, had demanded fiscal consolidation. So the Kenyan Treasury complied. The result? Petrol now costs nearly 200 shillings per litre. That is a 40% increase year on year. You do not need a degree in economics to know what happens next: transport costs surge, food prices follow, and the poorest bear the brunt.
The protests, led by the opposition coalition Azimio La Umoja, began peacefully. But as the sun set on Wednesday, the mood darkened. Stones were thrown. Tear gas canisters were launched. Then came the gunfire. Four bodies now lie in the morgue, and the government has imposed a curfew. The Kenyan shilling, already down 15% against the dollar this year, is now under fresh pressure. Capital flight is a certainty.
This is a textbook case of what happens when a government ignores the bond vigilantes. Kenya's sovereign bonds have been yielding over 14% for months. That is distressed territory. The country's external debt service costs have swallowed 60% of tax revenues. You cannot tax your way out of that hole. You need growth. And you do not get growth when your citizens are burning tyres in the street.
The parallels to the Arab Spring are uncomfortable. High food and fuel prices were the spark that toppled governments in Tunisia, Egypt, and Libya. Kenya is not there yet, but the tinder is dry. The government has two choices: reverse the tax hike and risk a default, or stand firm and risk a revolution. There is no easy answer. The central bank will probably have to hike interest rates further to defend the shilling, choking off what little private sector credit remains.
Investors are already voting with their feet. Foreign portfolio outflows from Kenyan equities have accelerated this month. The Nairobi Stock Exchange is down 8% in the last fortnight. This is not just a local story. It is a warning for every emerging market that has borrowed cheaply when rates were low and now faces a debt trap.
Let us not forget the irony. The IMF's prescription for fiscal discipline is meant to bring long-term stability. But short-term pain can trigger political instability that destroys the very confidence the Fund seeks to build. This is the prisoner's dilemma of sovereign debt. Kenya needs more money, but the conditions attached to that money are strangling the economy.
I will be watching the gilt market for any spillover. If this contagion spreads to other African sovereigns, we could see a broader sell-off in EM debt. The Bank of England may not care about Nairobi, but the global capital markets are interconnected. A crisis in Kenya can hit the balance sheets of British pension funds that hold Kenyan bonds. Do not underestimate the domino effect.
Four dead. Strikes spreading. The bottom line is this: Kenya is a canary in the coal mine. And the mine is filling with fiscal smoke.
