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Kenya’s political risk dampens investment climate

Saturday January 26 2013
tourist

Violence in Kenya’s Coastal region has seen the number of tourists reduce while investors have shied away. Photo/FILE

Political risk in Kenya could result in a sharp fall in new investments in 2013 — which halved last year.

New data by the Kenya Investment Authority (KenInvest), the agency that tracks investments in the country, shows the total annual foreign and local investments reduced from $1.84 billion in 2011 to $712 million in 2012, a 61 per cent drop.

KenInvest officials blamed the slump on security lapses in the country’s coastal region and the Kenya’s incursion into Somalia.

The number of new projects approved by KenInvest — which facilitates over 60 per cent of Kenya’s new investments — also dropped from 130 in 2011 to 103 in 2012.

However, the agency does not capture the portfolio investments that come through the Nairobi Securities Exchange (NSE).

Late last year, Kenya witnessed a surge in ethnic violence, especially in the Coast province, creating fear among other countries in the East African region that the violence experienced in Kenya following the 2007 elections could recur.

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Analysts said violence, and divisive campaigns in the run-up to the March 4, election, could shake the country’s political foundations and culminate in a possible downgrading of Kenya’s sovereign credit ratings.

A rise in Kenya’s risk profile — a combination of economic and political risks — could discourage foreign firms from investing in the country and raise the level of premiums that insurers will charge for political risk covers.

“Security concerns, especially the entry of Kenya into Somalia and the abductions of foreigners in Mombasa and Dadaab, made investors withhold investments,” said Kenneth Mutuku, the general manager in charge of research at KenInvest.

Data from the World Bank shows that over the past three decades, Kenya has had its slowest growth in or just following election years, with GDP growth slumping one percentage point on average below the long-term trend.

“What happened in Kenya in 2008 was awful... As a business, you plan for the worst and hope for the best. Neither Kenya, East Africa nor the rest of the world can afford a repeat of that,” said Jay Ireland, the president and CEO of General Electric, the largest US conglomerate, in a recent interview.

The concerns over a possible slowdown in investments come at a time when Kenya has stepped up its search for international investors through eight investment summits to be held in the world’s major financial capitals over the next seven months.

ALSO READ: Industry leaders cautiously upbeat with all eyes on Kenya

Kenya is hoping to engage potential investors in round table discussions on business opportunities in sectors such as energy, infrastructure, ICT, housing and urban development.

According to KenInvest, a direct loss of the political risk was a plan by Turkish investors to develop a five-star hotel in Mombasa and plans by a French company to invest in a wind power generation project.

Energy, construction and manufacturing sectors were most affected by the investment slump. The value of investments in the energy sector, for instance, dropped from $305 million in 2011 to $22.3 million in 2012.

The value of construction investments dropped from $223 million in 2011 to $12.9 million in 2012 while the manufacturing sector dropped from $211 million in 2011 to $75.2 million in 2012.

But not all sectors were affected by the security concerns. The construction sector, in particular real estate, suffered from high borrowing rates prevalent in 2012.

Last year, interest rates in Kenya hit a high of 25 per cent, which was among the highest in the world then.

The rates have now dropped to an average of 17 per cent, with the impact already being felt in a rejuvenated real estate sector, said Sakina Hassanali, head of research and marketing at Hass Consult, a property consulting company.

KenInvest approved zero investment projects in the agriculture sector in 2012 compared with eight in 2011 and zero projects in wholesale and retail in 2011 compared with six projects in 2012.

Data from the 2011 investment trends indicate that energy, manufacturing and construction were the main preference of investors based on the value of investments.

But KenInvest noted that it may also be because those sectors require high value investments in terms of machinery, which has to be imported.

But manufacturing still led in terms of number of projects that were given investment certificates. In the two years, 2011 and 2012, the manufacturing sector had 69 projects approved compared with 60 projects approved in the service industry.

The popularity of manufacturing is attributed to the need to meet the consumption demand of the growing middle class not only in Kenya but across the East African Community.

Kenya is the manufacturing hub of the EAC and therefore enjoys favour with new investors.

“There was a particular increase in the manufacturing of beverages, especially fresh juice,” said Mr Mutuku.

The Kenya Association of Manufacturers however warned that the success of manufacturing in 2013 will depend on the conduct of elections.

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