The terrorist attack at the Westgate Mall is expected to wipe at least 0.5 per cent off Kenya’s projected economic growth this year as a result of a worsened security risk profile, analysts said last week, even as the Treasury remained upbeat on growth projections.
The attack has raised questions on the country’s political risk profile, with the World Economic Forum saying Kenya’s security situation is worrisome. The attack left at least 67 people dead and nearly 200 injured.
Kenya’s political stability will be facing a crucial test in the coming months and perhaps years with the ongoing crimes against humanity cases at the International Criminal Court (ICC) facing President Uhuru Kenyatta and Deputy President William Ruto.
Any political instability or deterioration in security, analysts said, would hurt risk ratings, meaning the country could find it difficult to raise capital from the international markets including with the issuance of the planned sovereign bond, and will be required to pay higher interest rates for any money it is able to borrow. Kenya currently has a relatively favourable rating by global bodies.
Standard and Poor’s rating for Kenya is B+ stable while Fitch has assigned Kenya a B+ positive.
Moody’s, the global credit rating firm, said that while it expected the country to lose 0.5 per cent of potential GDP growth, the national credit rating was unlikely to be affected.
“We expect this high profile attack to be credit negative and will adversely Kenya’s growth and fiscal revenues, most directly through its effect on tourism,” said the rating agency in a note to investors last week.
Though there is consensus among market players that the attack would not have an impact on the country’s credit rating, there are fears that the market could punish the country’s lax security situation by demanding higher yields when it issues its sovereign bond.
A lower rating poses the risk of discouraging foreign investors from putting their money into Kenya and raises the level of premiums that insurers will charge for political risk covers.
“Insurance companies too will likely look into the possibility of extending their lines to include terrorism and sabotage cover. In this environment, the premiums are likely to be higher than at other times, but over the long term once things settle down, the premiums should remain moderate,” said George Otieno, CEO of Africa Trade Insurance.
Kenya plans to issue its debut Eurobond worth up to $2 billion during this financial year. The IMF and the government project the Kenyan economy will expand by 5.8-6 per cent, meaning the country could now grow by only about 5 per cent.
“The impact on Kenya’s planned Eurobond is limited since potential investors would not ordinarily base their decisions on one-off events but rather on the ability of a country to meet its debt obligations. However, if such events become more frequent, then crucial sectors such as tourism would be affected significantly in the long term, which could potentially weigh down Kenya’s current account,” said analysts at Stratlink, an advisory firm focusing on emerging markets.
Kenya’s tourism industry is estimated to contribute 12.5 per cent of GDP, 7.4 per cent of investment and 11 per cent of total employment, meaning that a slowdown would have a heavy impact on the Kenyan economy.
The stockmarket and the Kenya shilling have both remained firm, aided by positive sentiments from both the private sector and the government.
The local shilling defied expectations, strengthening against the dollar on account of increased inflows and demand for the local unit due to the infrastructure bond that closed last week.
“The rally may not hold for long, but the expectation is that in case the shilling weakens, the Central Bank will intervene,” said Karanja Ng’endo, a forex dealer at National Bank of Kenya.
Tourism is Kenya’s third largest foreign-currency earner, behind tea and coffee, but has been under pressure over the past five years from a myriad problems, most notably the post-election violence that rocked the country in 2007/08, the economic crisis in Europe, the global recession, as well as travel advisories issued by foreign countries following a series of grenade attacks in the country.
These challenges have seen figures from traditional markets in Europe and North America decline. For example, last year, tourism numbers from the key markets of UK, USA, Italy and Germany dropped 17.7, 9.3, 10.4 and 3 per cent respectively in the wake of security concerns.
Two prior violent episodes — the bombing of the US embassy by Al Qaeda in 1998 and the post-election violence in 2007/8 — resulted in sharp declines in tourism receipts, but were followed by strong recoveries.
“We assess that the economic impact of terrorist attacks has typically been shortlived unless they are combined with other peripheral factors that have been or will affect the economy. Kenya’s longer term fundamental economic prospects remain unchanged,” said Stratlink.
Already, the UK, Australia, Sweden and the US have issued travel advisories to their citizens to exercise caution when visiting the country.
The ripple effects of the Westgate incident could reach as far as Tanzania, with the country’s tourist players currently voicing their concerns over a likely drop in arrivals.
Official statistics show that over 40 per cent of the nearly one million tourists destined for Tanzania land in Jomo Kenyatta International Airport, later on crossing over the Namanga border into Tanzania.
“If Nairobi is considered a risk entry point, it affects given the huge number of our clients who transit through it… already we have seen a drop in safari inquiries,” said Peter Lindstrom, managing director of Hoopoe Adventure Tours, a Tanzanian tour firm.
By Peterson Thiong’o and Adam Ihucha