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ProfilesMarch 1 2012

Kenya braced for a momentous year

The next 12 months will be crucial for Kenya as it holds its first elections since its tumultuous 2007 polls. It will also try to recover quickly from last year’s spike in inflation, which sent interest rates soaring. Nonetheless, the country's economy remains strong and many are optimistic Kenya can reach middle-income status by 2030. 
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The next year promises to be a momentous period for Kenya. Presidential and parliamentary elections are due to be held this December or in March 2013. The polls will be the first since the bitterly disputed ones in late 2007, which saw more than 1200 people die in post-election violence, sent the economy crashing and tainted the country’s image abroad.

Much has changed in Kenyan politics since 2007. A new constitution was written in response to the post-electoral strife, enshrining the separation of the judiciary, legislature and executive, and giving local governments more autonomy.

Most Kenyans are confident such changes will strengthen the country’s institutions and help ensure a far more peaceful vote this time. “I don’t think we will see violence to the extent that we did in early 2008,” says Martin Oduor-Otieno, head of Kenya Commercial Bank (KCB), the country’s biggest lender. “We’ve moved on. People don’t want a repeat of what happened. There have been a lot of initiatives to ensure it doesn’t happen again.”

Close scrutiny

Nonetheless, the polls will be watched closely by investors, especially given that they will result in a new president being sworn in. The current one, Mwai Kibaki, is coming to the end of his second term and required by the constitution to step down at the end of it.

The outcome of the election is still far from certain. It was complicated further in January when the International Criminal Court charged four prominent Kenyans with crimes against humanity during the 2008 unrest. Two of them – former education minister William Ruto and Uhuru Kenyatta, who stood down as finance minister following the charges but remains as deputy prime minister – are leading presidential candidates. Should they decide not to contest the elections, or be barred from doing so, the main beneficiary could be Raila Odinga, the current prime minister. Many think he will garner the most votes in the absence of Mr Kenyatta and Mr Ruto’s names on the ballot paper.

The run up to the polls are happening at a precarious time for Kenya’s economy. Inflation rocketed from 5.5% in January last year to 20% in November amid rising costs for fuel imports and poor rains, which sent food prices higher. The central bank, criticised by many for not reacting quickly enough, eventually raised interest rates from 7% to 18% between September and December.

Following good rains in late 2011 and thanks to the tighter monetary policy, inflation now seems under control. Bankers expect the central bank to start easing rates by the middle of 2012. Still, the fact they have risen so much is likely, at least in the short term, to curb credit growth – which has been crucial to Kenya’s quick economic expansion over the past decade – and hurt existing borrowers in the country, almost all of which pay floating rates of interest.

Eurobond on hold

Kenya’s planned entry into the Eurobond market has probably been delayed by the looming elections and inflationary woes. It had been expected to try to issue a debut deal this year as a way of diversifying from its local bond market. But it recently mandated Citi, Standard Bank and Standard Chartered to arrange a $600m two-year syndicated loan. Most analysts think the facility will be enough to cover Kenya’s external borrowing needs until at least next year, if not 2014. “It’s not the ideal time to secure the best possible [bond] pricing,” says Razia Khan, head of African research at Standard Chartered. “That, combined with the fact the syndicated loan is going ahead, means there probably won’t be a Eurobond just yet.”

But if and when Kenya, which is rated B+ by Standard and Poor’s and Fitch, does try to issue a Eurobond, it will likely attract plenty of interest from international investors. Its economy remains resilient, despite the spike in inflation. Gross domestic product is forecast by the World Bank to rise 5% this year, which analysts say is impressive given the lack of natural resources in the country. “That’s a very decent growth rate given the circumstances,” says James Mwangi, chief executive of Equity Bank, which has more retail customers than any other lender in Kenya. “Growing at 5% at a time like this – [having just been through] drought and famine – means this economy is resilient and can easily, with the right global environment, reach and sustain a [higher rate].”

The government wants the country to attain middle-income status by 2030. It aims to achieve this through further political reforms and by developing what it sees as key economic sectors, such as tourism, banking and information technology. It hopes Kenya will not only maintain its place as east Africa’s leading economy, but become a hub for Chinese and Indian investment on the continent. “The only way to get there is to make Kenya a globally competitive economy,” says Mr Mwangi. “We have to understand what our competitive edge is and be very good in that.”

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