Kenya Business Forecast Report Q2 2008

Post-election Violence Shakes Kenya's Foundations

Kenya is East Africa's most developed country. The pace of economic growth has quickened in recent years and the country has (until recently) maintained a high level of political stability. Its economy is relatively diversified, with a strong manufacturing sector. Tourism and foreign investment have proved key drivers of growth in recent times. This quarter, our macroeconomic forecasts are overshadowed by the impact of the violence which flared up in the aftermath of the disputed presidential election results at the end of 2007. Although we are sanguine for now, believing that there is still enough momentum for political reconciliation, we remain mindful of the downside risks for Kenya's economy and financial markets, should mediation attempts fail.

The dramatic escalation of violence in the aftermath of the December presidential election underscores the level of political risk in Kenya. The unrest which occurred following the disputed election results exposed the degree of ethnic tension within the country; over 600 people died and 250,000 were displaced. Supporters of President Mwai Kibaki, especially members of the Kikuyu tribe which the president belongs to, were particularly targeted. Hope stems from possible dialogue between Kibaki and his political opponent Raila Odinga of the Orange Democratic Movement (ODM) party, through the mediation efforts of former United Nations head Kofi Annan.

Foreseeing dampened tourism, private consumption and foreign investment, we have made a downward revision to our real GDP growth forecast for 2008 to .0% from a previous 6.1%.

Thereafter, we expect annual growth to remain above 5.5% over 2009-2012, although our broadly upbeat outlook is dependent upon a political resolution. Our core view is that the key drivers of strength for the Kenyan shilling - including tourism and foreign investment - will recover over the course of 2008, although their trajectories will be lower than those anticipated prior to the political unrest.

The frailty of Kenya's institutions has been laid bare by the post-election crisis, which raised questions about the rule of law. Kenya's judiciary has long been dependent upon political favour and this failure to separate powers by ensuring independence for the country's court is a key reason for its poor track record on corruption. Kenya's physical infrastructure is relatively strong: official 2006 statistics state that Kenya has 2,778km of railways and 63,265km of inter-urban roads (although only 14% of these roads are paved). According to 2007 figures, Kenya has 225 airports, with 15 of those having paved runways. The size of Kenya's economy and its role as a regional leader and industrial hub have been complemented by the region's most open business regime to make it a regional investment magnet.