The presence of global multinationals in Kenya’s capital Nairobi has for decades attested to foreign investors’ view of the country as east Africa’s economic powerhouse. Hosting brands ranging from US internet giant Google to Finnish telecoms company Nokia and Japanese electronics conglomerate Sony, Kenya has been seen by many as the destination of choice for foreign companies seeking to establish a presence in east Africa.
“Kenya is viewed, in the east African context, as being a relatively advanced economy, and its GDP per capita is [more than] $1000, which is substantially higher than that of Tanzania or Uganda or anywhere else in east Africa,” says Ravi Bhatia, director of sovereign ratings at Standard & Poor’s. “That points to the strength of the Kenyan private sector, which is dynamic and a hub for business activity across east Africa. If foreign companies are setting up a regional headquarters, it is always in Kenya.”
Nevertheless the country has, in recent years, suffered critical political setbacks. As Kenya prepares for its presidential elections this year, its international reputation as a stable investment destination is at stake. The widespread violence that followed the disputed results of Kenya’s 2007 presidential elections, where more than 1200 people were killed in clashes, brought into sharp focus the country’s ethnically fractious politics. Investor confidence was significantly damaged as several businesses in Nairobi suffered losses and Kenya’s economic growth contracted from 7.1% in 2007 to 1.6% in 2008, according to the World Bank.
Kenyan politics is dominated by allegiances that are shaped along ethnic lines and is, according to the risk analysis firm Maplecroft, “inherently unstable”. The elections, which are set to take place in March, will thus be a critical juncture for a country that is losing its allure as a stable investment destination for foreign businesses.
With the polls likely to pit current prime minister Raila Odinga’s Coalition for Reform and Democracy Alliance against Uhuru Kenyatta and William Ruto’s Jubilee Alliance, at issue will be whether the losing party will accept defeat peacefully. Additionally, the International Criminal Court’s (ICC) final verdict on Mr Kenyatta and Mr Ruto’s involvement in the 2007 post-election violence will be another test of the country’s internal stability.
“There is a danger of political and social unrest, and there is the fact that the political personalities in Kenya have so much weight – almost more than the parties that they belong to,” says Adjoa Anyimadu, assistant researcher for the Africa programme at London-based independent policy institute Chatham House.
“Then there is the complication of the ICC indictments," she adds. "The fact that the second and third most popular Kenyans, Uhuru Kenyatta and William Ruto, who have been indicted by the ICC, are both running for office [together] is interesting and it remains to be seen how this pans out. I think people are aware of the practical problems of a president who [may be] potentially indicted by the ICC. They would not be able to travel and they would not necessarily be able to communicate effectively with donors and so on. Also, this is the first election under the new constitution and this is the first election using the biometric voter registration, so there is a danger that things will go wrong on the day and that has the potential of leading to violence.”
A look at historical data reveals foreign investors in the country have been highly sensitive to the political events, with investor confidence tending to decrease in the lead-up to elections. According to the greenfield investment database fDi Markets, total capital expenditure on greenfield FDI projects in Kenya decreased from a high of $578.5m in 2004 to a low of $332.3m in 2007, when elections were held. In 2009, capital expenditure on greenfield projects spiked to a high of $3.7bn, reflecting an increase in investor confidence following the resolution of the 2007 post-election crisis.
In the past two years, FDI has sharply declined from $2.9bn in 2011 to $969.1m in 2012, revealing that investors are once again holding back awaiting the outcome of Kenya’s elections. “In the short term, investors are going to hold off and markets are going to be subdued in the run up to elections,” says Mr Bhatia. “[They] are going to be bearish coming in to the elections and as it is now not far away, they are going to watch and wait [until] after the elections.”
Nevertheless, some investors in the country contend that, although the elections are a primary concern, the risk must not be over-stated. DeLyle Bloomquist, the president and chief executive of Tata Chemicals North America, which runs an operation in Kenya’s Rift Valley Province, says his outlook on the country is characterised by cautious optimism. “We are concerned but we are also hopeful that elections will be peaceful,” says Mr Bloomquist.
“There have been a few [positive] things that have happened since 2007, which will hopefully mitigate some of the violence and animosity that occurred then among the different ethnic groups,” he adds. “For example, in 2010 a new constitution [was passed] that transfers power to the local government. We are hopeful that this will make people feel a little more empowered and less reliant on the central government. [The elections] are a big concern for us and we do not want what happened in 2007 as it will be a real problem for the country if they have two elections in a row that are violent. I am hopeful that things will go peacefully and we will continue in a ‘business-as-usual’ way.”
Rebuilding a reputation
Indeed, some observers maintain that although Kenya’s outlook remains uncertain, the country’s authorities are keen to rebuild its appeal as east Africa’s hub of democracy and stability. The African Development Bank expects the country’s real GDP to grow from 5.2% in 2012 to 5.5% this year, and there is a distinct possibility that the country’s new leaders could work to deter another repeat of the 2007 violence.
“Kenyans, in general, are aware of the need to restore their reputation, which they lost after the last elections,” says Ms Anyimadu. “There [exists] an understanding that Kenya has traditionally been the biggest and most established economy of east Africa, so that sort of [violence] should not be happening. Kenya is actually ranked [by the World Bank] in the top 10 African countries in terms of ease of doing business and that works in its favour. So there is an interest in Kenya to restore that impression. There are so many issues that are uncertain, yet having said that, there is a lot of hope that the elections will not go badly.”