(Bloomberg) -- John Mbadi, the accountant that Kenya’s president nominated to head the Treasury, may lack international standing but analysts reckon he’s probably the right political choice to push through unpopular tax measures.
Mbadi is one of four opposition members President William Ruto picked when reorganizing his cabinet in a bid to quell deadly anti-government protests sparked by the tax plans.
All four represent large ethnic communities that are Ruto’s biggest critics. And while the move is unlikely to pacify the young, urban and mainly educated protesters — who’ve criticized the history of ethnic tensions in Kenyan politics and refer to themselves as tribeless — it got a thumbs-up from analysts.
“While some may argue Mbadi does not have the international financial credibility to handle the post, his local political pedigree is excellent and will do well to shepherd through parliament a new fiscal bill, albeit more inflationary than expected,” said Sebastian Spio-Garbrah, chief analyst at Damina Advisors LLP.
The unrest that caused the deaths of at least 54 people forced Ruto to withdraw a raft of contentious tax measures that would have raised more than $2 billion in additional revenue. Ruto subsequently cut spending by about 3% and widened the fiscal deficit to reflect the lower income.
Mbadi, who’s chairman of opposition leader Raila Odinga’s Orange Democratic Movement party, has been a lawmaker since 2008. In the National Assembly, the 53-year-old often criticizes the government over its borrowing.
“His submissions to parliament suggest he has little tolerance for high debt expense, and has been at pains to recommend that Kenya raise the share of concessional debt in its portfolio relative to expensive commercial borrowing,” said Michael Kafe, an economist at Barclays Plc. “This is all in line with the Ruto administration’s ongoing plans to deal with the country’s debt challenges, and his appointment may help bring some new ideas.”
Poisoned Chalice
By appointing him, Ruto’s handed a poisoned chalice to the opposition. Mbadi will have to implement the president’s manifesto, which he opposed during tightly contested elections in 2022.
Ruto’s so-called Bottom-Up economic model seeks to channel resources to industries that can generate the most jobs and drive growth. Pushing through the president’s pet projects — an unpopular low-cost housing program and plans to roll out a universal health program — are now Mbadi’s issues to deal with.
In December, the ODM party obtained a court order freezing the planned privatization of state-owned companies that the government has earmarked to raise cash for budget spending. A judgment on whether the sale can proceed is due later on Friday.
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Mbadi’s priority should be stabilizing the budget, Barclays wrote in a note to clients. In a budget last month, the previous Treasury secretary placed the fiscal deficit at 3.3% of gross domestic product. While changes to financing plans have since pushed that to 4.2%, the gap is still smaller than an estimated 5.6% in the past fiscal year.
“His position on implementing fiscal reforms through tax hikes will be scrutinized, having previously been a strong critic of tax increases,” BancTrust & Co. investment bank said in a research note.
Pain Points
Handling Kenya’s debt will be another pain point. During the election, his coalition party’s presidential candidate Odinga pledged to restructure and re-profile Kenya’s debt stock.
In the past fiscal year, Kenya spent about three-quarters of its tax income on repaying debt, which the International Monetary Fund classifies as at high risk of distress. The nation is at the tail end of a $3.6 billion IMF financing program that requires it to accelerate domestic revenue collection and curb borrowing. The Treasury had indicated it may seek a fresh deal.
Mbadi, a proponent for concessional loans, will have to see through the economic belt-tightening conditions that accompany such programs, while finding ways to generate about $5 billion for overdue pension payments and government bills.
He’ll also have to ensure a cost-of-living crisis doesn’t boil over. A year ago, Odinga staged paralyzing protests against the rising prices of basics such as food. Ruto also relinquished the energy ministry to the opposition, transferring the headache posed by constantly climbing fuel prices to his erstwhile rivals.
The shilling has lost more than 3% against the dollar in the six weeks of unrest. The yield on Kenya 2031 eurobonds is at 10.8%, the highest level since it was issued five months ago.
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(Updates with court ruling on privatization in 10th paragraph.)
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