Business leaders in East Africa are placing their bets on an improved economic environment in the region in the coming year, cautiously optimistic that lower inflation and stable currencies could help reverse the troubles of a not so good 2012.

But for Kenya, uncertainty around the March 4 General Election could slow growth in the first quarter, with fears that a disputed election result could spark violence that could impact neighbouring countries as it did in 2007-2008, disrupting regional supplies.

According to business executives and economic analysts who spoke to The EastAfrican, foreign direct investments (FDI) in the region is expected to grow in 2013 as investors eye opportunities in infrastructure development, oil and gas exploration and the consumer sector.

Most recent reports by FDI Intelligence, a division of the Financial Times and United Nations Conference on Trade and Development indicated that FDI inflows in EAC will continue to increase. The reports indicated that countries like Kenya are now attracting more FDI thanks to sustained investment promotion and discovery of oil and commercially variable gold deposits.

READ: Kenya ranked among top FDI destinations in Africa

But the rush to attract FDI has had its downside. A report released in April 2012 shows that EAC members are losing up to $2.8 billion every year in the form of revenue forgone in tax and other incentives that they offer to attract foreign investments.

Extractive industries, consumer and financial sectors are expected to drive FDI inflows in the EAC, business leaders said.

These inflows will be boosted by the maturing EAC integration, further lowering the barriers to intra-regional trade, enabling businesses to access a larger pool of consumers.

The World Bank, in its latest economic update, however projects that Kenya will in the coming year grow at a slower rate than other East African Community (EAC) member states, eroding its economic superiority.

The Bank estimates that Kenya’s economy will grow at five per cent next year, only if it has a peaceful election. This is lower than the predicted 6.1 per cent growth rate for the rest of the EAC.

READ: Election jitters to slow down Kenya’s growth - World Bank

Kenya’s final growth rate for 2012 is expected to be 4.3 per cent compared with 5.5 per cent for the EAC, with every possibility that other EAC states could catch up with it especially if the March 4 election is not peaceful. Since 2008, Kenya’s average growth rate has been 4 per cent, lower than Uganda, Tanzania, and Rwanda’s average of 6.8 per cent.

“Investors are likely to hold back in the first two months until elections in Kenya are held,” said Michael Turner, the East Africa director of Actis, a private equity fund. “They will be careful not to let their investments be locked-in in case of violence that has dominated Kenya’s election cycle.

But peaceful elections will increase investors’ optimism in the region beyond the current levels,” said Mr Turner. He further said that the company is looking to increase its investments in 2013 with key focus on consumer sector and manufacturing.

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“Income levels in the region are rising and this means there are lots of opportunities in the consumer sector. The resources sector presents fantastic growth area for the region,” he said, adding that investments in power generation will peak in 2013 as EAC members pursue different power generation projects ranging from geothermal in Kenya, to gas in Tanzania and hydro-generation in Uganda.

Latest data released by the Kenya National Bureau of Statistics in the last week of December 2012, show the country’s economy grew by 4.7 per cent in the three months to September 2012, up from 3.3 and 3.5 per cent in the second and first quarters respectively.

According to the bureau, “The expansion was more robust in comparison with the preceding quarters of 2012 primarily due to strong performances agriculture and forestry, fishing, manufacturing, transport and communication sectors, as well as a turnaround in the performance of the electricity industry.”

However, Kenya has in the past relied on inflows from the service sector to stabilise the unfavourable balance of payment but with election jitters and insecurity keeping tourists and capital investors out, the country remains vulnerable.

Recent terror attacks in Nairobi and Mombasa have prompted travel advisories from traditional markets of the United Kingdom and the United States.

“In Kenyan business circles, there is serious concern about what is happening in the country,” said Vimal Shah, the chairman of the Kenya Association of Manufacturers.

In general though, investors are optimistic the business environment will improve in the coming year.

Coming from a depressed economic environment experienced in 2012, Kenya, Burundi, Rwanda, Uganda and Tanzania will all need to rework their investment priorities to favour agriculture, which remains the main driver of these economies, said Joy Kiiru, who teaches economics at the University of Nairobi.

In 2012, the region took a beating from high inflationary pressures driven by high food and petroleum prices. Currency instability was also rife as dependence on imports shot to new highs.

Combined, these factors stifled growth across the entire region. But inflation has slowed across the region while the currencies are now less volatile.

Solomon Asamoah, the chief investment officer of the Africa-focused fund Africa Finance Corporation, said the company will make major investments in the EAC in 2013.

The company has set aside $200 million dedicated to the region and could add $150 million to that investment with focus on a wind-power farm in Kenya, geothermal generation and undisclosed investments in Uganda and Tanzania.

“EAC is presenting exciting opportunities and that is why we are making this commitment investing in 2013. The growing middle class and discovery of oil and gas will continue to drive economic growth,” said Asamoah in an interview.

READ: African economies attract funds

In Uganda, the economy in 2012 suffered increased headline inflation fuelled by food supply disruptions and unstable prices of petroleum products.

The government now projects an “under potential” real GDP growth to remain through 2012/13 on the account of a weak performance on the demand side of the economy.

“Since the last monetary policy statement in November 2012, the prospects for real economic growth in 2012/13 have weakened, ” said the Bank of Uganda in a statement.

“The main constraints to economic growth in the short term are the weakness on the demand side of the economy, lack of growth in private sector borrowing, the need to cut government expenditure in response to donor aid cuts and the difficult global economic outlook,” said the BoU in its report.

READ: Uganda’s economic growth skewed — report

According to the World Bank, Tanzania was a rock of stability economically in 2011/12, recording solid growth and maintaining strengthened fiscal discipline despite increases in the rate of inflation.

The World Bank expects the country’s economy to improve in 2013 and 2014 on the account of a strong fiscal policy. Tanzania’s economic prospects look positive for the period 2012-14 when its GDP is forecast to grow at a rate of 6.5-7.0 per cent, says the World Bank.

In early December, Rwanda’s Finance Minister John Rwangombwa said the country’s economy could be hit by recent aid cuts, could forcing the country to revise its 2012 growth projections downwards from 7.6 per cent to 6 per cent growth.

Major donors have suspended aid to Kigali over allegations that the country is supporting M23 rebels fighting in eastern Democratic Republic of Congo.

Many analysts agree that agriculture will be a key economic driver in 2013.

“Agriculture’s growth is always synonymous with that of the entire economy. It is the one sector whose output, is directly proportional to the input so we need to put in more money if we want to see the sector grow and boost the economy,” said John Omiti, the principal policy analyst and head of productive sector division at the quasi-government Kenya Institute for Public Policy Research and Analysis.

Agriculture is the backbone

The agricultural sector is the backbone of many African economies contributing about 27 per cent of Kenya’s GDP. The sector contributes about 22 per cent and 25 per cent of Uganda and Tanzania GDP respectively.

Tim Smyth, the chief executive Officer of TBWA, an advertising agency, sees the retail sector being the dominant and most vibrant business sector in the EAC in 2013.

A growing middle class defined by higher disposable income will drive the growth of the retail sector, said Mr Smyth, adding that a rising number of multinationals are likely to shift their African bases from South Africa to Nairobi in the coming three years. “This shift means investors are taking a long term view of Kenya and the EAC,” said Mr Smyth.

Reported by Steve Mbogo, Mwaura Kimani and Charles Wokabi