ICC process hurts Kenya's credit rating

By John Njiraini

"The ICC process will not have any impact on the economy. Kenya has proven to be mature and we will continue."

These were the words of Finance Minister Uhuru Kenyatta on 15 December, last year, soon after the naming of six individuals alleged to have bore the biggest responsibility over the post-election

violence by the International Criminal Court (ICC) prosecutor Luis Moreno Ocampo.

Being among the six suspects, and considering that he is the man in charge of the country’s Treasury and by extension the economy, it was important for Uhuru to calm nerves and reassure the business community and investors.

Some of the six Kenyans who appeared at the ICC last week with their lawyers. [Photo: FILE/STANDARD]

That was then. Last week, as Uhuru and five others made their debut appearance at the ICC to face charges for crimes against humanity, uncertainty was fast creeping in with analysts fearing the economy might no longer be insulated from the process and its wider implications in the country’s political arena.

With the world attention focused on Kenya, a country considered East and Central Africa’s economic hub, the proceedings at the Hague resurrected ghosts of the post-election violence and reminded Kenyans and foreigners that political risk continues to hover unfavourably over the economy.

More importantly, the unfolding of the proceedings, a time when political temperatures are fast rising ahead of the general elections next year, is causing apprehension that political instability could impact negatively on economic growth.

Guarantee security

Though the Government has promised to guarantee security, the sharp divisions that are emerging in various parts of the country due to political rhetoric are already a cause for worry for businesses and investors.

"The outlook for Kenya as an investment destination is positive. But we need to continue addressing Agenda Four on reforms to cement long term stability," said Patrick Obath, the chairman of the Kenya Private Sector Alliance (Kepsa).

With political risk now becoming a topic for discussion in boardrooms, analysts contend the commencement of proceedings at the ICC could not have come at a worse moment for the economy.

This is because the economy is already feeling the pressure of numerous shocks that have seen a slowdown in growth and are sending the standards of living over the roof.

"Most of last year’s optimism appears to be waning due to a number of headwinds in the horizon," said David Achungo, an investment manager with Pine Bridge Investments.

By all accounts, 2010 was a good year for the economy. After going through a tough period in 2008 and 2009, in 2010 the economy fully recovered from the devastating effects of the post-election violence and the global economic crisis and is projected to have registered a gross domestic product (GDP) growth of 5.2 per cent.

In 2010, all economic indicators showed strong stability with inflation averaging five per cent. The shilling enjoyed a relative calm exchange rate of Sh80 to the US dollar while activities at the Nairobi Stock Exchange rebounded.

Thus by December, few analysts thought the tremor caused by the naming of the ‘Ocampo Six’ would be powerful enough to shake the economy.

Rightly so, the unveiling of the six has had little impact for the first quarter of this year and the bumps the economy has encountered are due to other factors.

But over the past four months, January – April, the economy has encountered numerous shocks ranging from high prices of oil, soaring inflation, weakened shilling against major world currencies, rising prices of commodities and fears of food shortage if the long rains are not sufficient.

Vision 2030

The effects of the shocks are already being felt with analysts projecting a slowdown in economic growth this year, something that could again jolt the implementation process of the Vision 2030 blueprint.

Though the Government anticipates the economy to grow by 5.7 per cent this year, according to the Budget Policy Statement tabled in Parliament recently, analysts contend growth could be depressed and fall below the five per cent mark.

"We project a slowdown in growth momentum in 2011 of between 4.5 per cent to 5 per cent," said analysts at Pine Bridge Investments.

Of importance to note, the ICC process has had little impact in instigating the gloom being witnessed on the economic front so far despite rising political noise that preceded the first appearance of the six at the ICC in Hague last week.

But after the six Kenyans were paraded at the ICC, where warlords of failed states like Sierra Leone, DRC, Liberia and the former Yugoslavia among others are being tried, and the presiding judge Justice Ekaterina Trendafilova raised concerns that utterances by politicians could ignite violence, analysts are cautiously optimistic the coming months will be rosy for the economy.

"I believe the ICC process will take its own course and the economy will also take its own course," said the director general of the Vision 2030 Implementation Secretariat Mugo Kibati.

He, however, added this would depend on how Kenyans react as over-excitement or violence could be disastrous for the economy.

These fears, compounded by worries emanating from the parastatal mandated to ensure a positive image of the country that heightened and divisive politics are harming the image of the nation, show the rising political risks might threaten economic recovery.

Behind schedule

"Politics is compromising our image negatively and this is not good for the country," said Brand Kenya chief executive Mary Kimonye.

There are good reasons to be concerned. First, it is important to note that the implementation of the Vision 2030 blueprint, though in progress, is already behind schedule. While the Government has set a target of 2013 for the economy to commence cruising at double-digit growth, the possibilities of a drawback are now real.

Besides, though there are no signs the country could plunge into violence, the rising political tensions could impact on business expansion plans as investors take a wait and see attitude. This, in effect, has impacts on job creation in a country where unemployment is at alarming levels.

Foreign investors are now being forced to factor in political risks before venturing into the country. While this might not stop them from investing in the country, deciding on where to locate their enterprises is now a critical aspect, with avoiding areas perceived as hotspots being the buzzword.

"Foreign investors want stability. This is important," said Obath.

In deed the perception that Kenya is not stable enough is impacting negatively on foreign investments.

According to the International Monetary Fund (IMF), in East Africa only Tanzania is ranked among the 10 fastest growing economies in the world largely due to positive effects of political stability. Ranked at position seven, the country is projected to grow at an average of 7.2 per cent over the next five years.

Local players in the tourism and cut flower industry are also apprehensive. Going by the experiences of 2008, the possibilities of political instability pose grave dangers to the sectors.

Though players in the sectors are optimistic of continued growth after tourism raked in Sh70 billion last year, the events in the political scene will greatly determine whether the sector maintains the impressive arrivals or crumble yet again.

While it is still early for a clear analysis, players contend the appearance of Kenyans at the ICC court is a double-edged sword for the country.

"Some people might see the process as a commitment to justice and this is good. But others see Kenya as a failed state with ineffective institutions," said a leading hotelier.

He added the future of tourism solely depend on whether the country will go though a smooth electioneering period and hold together after the poll.

This might be the case in the cut flower industry. According to the Kenya Flower Council chief executive Jane Ngige, political instability could negatively impact in the subsector as witnessed in 2008 where activities in flower farms in Naivasha were largely disrupted.

"We are hoping politics will not disrupt our business," she said, adding that despite the ICC process taking place at the Hague in Holland where majority of Kenya’s flowers are exported, there has not been any major impact so far.

Last year, cut flower subsector earned Sh35 billion and exported a total of 100,000 tons.

In the meantime, the business community can only bank on Uhuru’s assurance that the ICC process will not affect the economy.