Post-election hope and stability in Kenya
Will investors and Obama notice?

Reuters

Supporters of Kenyan presidential candidate Uhuru Kenyatta celebrate on the outskirts of Nairobi March 9, 2013.

Article Highlights

  • Recent Kenyan elections show that Kenya is in a good place for investors and citizens

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  • the West should show continued support for Kenya's economic development, not righteous indignation

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  • FDI increasing in Kenya is a sign of international investors confidence in the nation

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GDP growth of around 5% would make President Obama's agenda much easier to implement. Unfortunately, the U.S. has not seen growth rates in that range since the Dot-Com bubble, but the land of his ancestors is experiencing them right now. Kenya is not one of the most visible emerging markets, due to its location and poor starting situation, but its key position in East Africa, fortified by solid growth prospects and progress on the governance front, makes it deserving of attention from investors and policymakers alike. The relative calm surrounding last week's presidential election confirmed this emphatically.

This past Saturday afternoon, Kenyan Deputy Prime Minister Uhuru Kenyatta (not coincidentally the founding President's son, in a country where voting mostly takes place along tribal lines) was declared the winner of Kenya's first presidential election under the new, modernized Constitution it passed in 2010. After almost a week of manual vote counting, with most businesses and schools in the capital city of Nairobi closed, the Independent Electoral and Borders Commissions announced that a slim but absolute majority, 50.07%, of ballots were cast for Kenyatta, making a second-round runoff unnecessary. So far, and in sharp contrast to events following the last round of presidential elections in 2007, no violent response has materialized. The discontent of the most important losing contestant, Raila Odinga, the founding Vice President's son, has so far manifested itself only in the form of legal challenges. International investors also provided a vote of confidence, with FDI rising during the year leading up to the election.

Kenyatta, Kenya's richest man, is expected to continue the current national-unity government's macroeconomic policies of the last few years that have facilitated steady growth and received the IMF's stamp of approval. Tight monetary policy has driven down inflation, which stood at about 20% in November of 2011, to within the government's target range of 2.5-7.5%. As a consequence, interest rates have started coming down, stimulating investment across the board. On the fiscal-policy front Kenya's FY 2011/2012 primary deficit was 2.2%, bringing its debt-to-GDP ratio down to 45%. Improvements in excise, income and VAT collection practices should allow for fiscal consolidation to continue.

At the same time integration within the East African Community, the customs union and common market comprising Kenya, Burundi, Rwanda, Tanzania, and Uganda, is proceeding apace, confirming Kenya's central position in the economy of East Africa, which depends heavily on its access to waterways and for which it serves as the main financial and commercial center. The former British colony is also home to most of the development NGOs serving the region, and has assumed a leadership role in containing and battling al-Shabaab, the Al-Qaeda cell based in Southern Somalia. All of these factors will make it hard, if not undesirable, for Western nations concerned about Kenyatta's indictment by the International Criminal Court (for crimes against humanity during the violent fallout from the last round of presidential elections in 2007) to impose significant sanctions of any kind.

Tourism and especially agriculture (coffee, tea, cut flowers) continue to dominate the Kenyan economy, in particular its export sector. That said, recent oil and gas discoveries and a flurry of exploratory activity, including by U.S. firms, suggest that natural resources could provide a significant boost in the near future. Foreign direct investment, now mostly from China, India, and other emerging economies instead of Germany, the Netherlands and the UK, traditionally the leading foreign investors, has started flowing to sectors outside of construction, signaling a move toward a more diversified economy. Chinese companies, for example, have invested heavily in car manufacturing, food and beverages, communications and electronics -- in addition to infrastructure development. In 2011, Kenya was the second most important destination of greenfield FDI projects in Sub-Saharan Africa, after South Africa. On the consumer side, the deepening and increasing inclusiveness of the Kenyan financial sector, facilitated to a large extent by locally developed mobile telephone money transfer services and other technological innovations, has provided previously underserved communities with easier access to credit and payment services.

In sum, and even though an ICC indictee is clearly not everyone's favorite kind of leader, Kenya is the indispensable nation in a part of the world that finally appears to have a shot at offering opportunity to both its own citizens and foreign investors. Given the facts on the ground, what the West should show right now is continued support for Kenya's economic development, not righteous indignation about the failings of the past.

Stan Veuger is an economist at the American Enterprise Institute. 

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