Kenya’s political risk casts a dark cloud over region’s economic prospects

On Friday last week, Kenya’s High Court declined to give a definite date for the country’s next elections, placing the task in the hands of President Kibaki and Prime Minister Raila Odinga.

A three-judge bench of the Constitutional Court, in a landmark ruling, declared that unless President Kibaki and Mr Odinga dissolved the government by the end of October 2012, the next elections could be held in early 2013. Should the President and the PM opt not to bring an end to their mediated political marriage, the judges ruled that the elections date would be hinged on the term of the current Parliament, which comes to an end on 14 January next year.

The ruling by Justices Isaac Lenaola, David Majanja and Mumbi Ngugi added more uncertainty to the date of the next elections which has been a subject of heated debate.

A recent poll done by the East African found that at least 15 CEOs from Uganda, Kenya, Rwanda and Tanzania expect harsh economic times in 2012. This is mainly on the back of fears over Kenya’s political climate ahead of the general election. They fear any violence and a general rise in political risks could hurt businesses and economies in the region as they rely on Kenya for the importation of raw materials and essential commodities.

In 2008, violence in Kenya disrupted supply chains around the region, causing shortages of fuel and other commodities in Uganda, Rwanda and Burundi. Such a dim outlook is expected to force business executives to keep a tight grip on expenditure to manage costs.

The business environment is expected to be further compromised by high inflation, currency fluctuations and rising interest rates, which could hurt lending to businesses and households.

Last year saw East African economies struggle to stay afloat, with Kenya’s growth slowing down in the last two quarters. Stock markets followed suit with the Ugandan and Kenyan indices both losing over 30% in USD terms.

Tanzanian business executives are also worried about political instability in light of pressure for a new constitution, which is expected to heighten this year.

While the IMF expects Uganda’s economy to grow at 5.5% in 2012, disagreements around the oil contracts and sharing of the spoils are expected to dominate the economic and political arena.

Rwanda is expected to record the greatest economic growth in the region owing to improvements in business environment.

As much as there are bright economic prospects for sub-Saharan African countries, it remains clear that one of their drawbacks is political risk. We hope that governments in the region will make progress in reducing this and other risks so as to increase their allure to investors.

An encouraging event in Kenya was when the country promulgated a new constitution in August 2010. We hope that the devolving of some resources to the grassroots from central control will help ease the urge for the different ethnic groups to want ‘one of their own’ to ascend to power, hence reducing the risk of a repeat of the 2007/2008 post-election chaos.

Imara is an investment banking and asset management group renowned for its knowledge of African markets.