Kenya: Why the Yes Vote Will Force a Radical Change in Country's Risk Rating

9 August 2010
Nairobi — Foreign businessmen in Europe and the US who have committed billions of dollars to the Kenyan economy went to bed on Tuesday night with major doubts in their mind.
There was, after all, a high chance that violence would break out if Kenyans voted for the new Constitution and major newspapers around the world had warned their readers over the weekend about this gloomy expectation.
However, they awoke on Wednesday morning to the sobering reality that there would be no violence in Kenya - meaning that they were assigning a punitively high political risk rating to the country.
With Kenyan politics now showing strong signs of stabilising and the country taking significant steps with the passing of the Constitution that could quicken the pace of consolidating democracy, investors will in the next few months be forced to radically reassess their risk models.
It is a path Kenya was expected to pioneer two years ago, but failed with major consequences. Ghana, with its peaceful elections last year, set the pace and Kenya's peace referendum puts it in the league of emerging democracies in Africa.
If the level of global optimism persists, it could see a new wave of rising foreign investment flows into Kenya leading to a major strengthening of the shilling and the emergence of a bull market in the equity and property markets.
This realignment of risk will affect both investment portfolios held by foreign institutional investors and major firms that have either scaled down or held back their involvement in Kenya as the country fell out of favour with politicians in the West because of its bad politics and governance issues.
Over the past eight years, more so after the 2008 political violence, Kenya has ranked consistently among the basket cases in the influential Failed States Index compiled by Foreign Affairs magazine and the Carnegie Foundation's Fund for Peace.
In the 2010 rankings, Kenya dropped to position 13, sitting at the bottom with neighbours Somalia, Democratic Republic of Congo, Sudan and Chad.
This ranking was in the same league as Iraq, Afghanistan and Pakistan. Freedom House, an organisation that specialises in promoting democracy, ranked Kenya among what it calls "partially free" nations.
In the world of a human-rights activists sitting in Washington, there seems to be no difference in perception of whether Kenya in 2010 is a failed state in the same league as Somalia or Afghanistan, but these rankings shape the perception of trustees of pension funds making decisions over whether to put their money in KCB shares or HSBC in Hong Kong.
The questions that are likely to occur when judging the Kenyan situation as an investment case is how much longer Western firms can continue missing out on opportunities as Brazil, India, Russia, China and South Africa, the so-called Brics nations, continue making inroads into the continent.
Why would Bric nations have a better perception of risk when it comes to Africa? A lot of it comes down to the fact that these countries have shared experience in their development path with African nations.
Indeed, some of them have political systems that are not judged as democracies and their managers know well how to operate in these environments.
Political risk ranking is important in a world where investors have to take decisions on where to invest billions of dollars every year based on how they and a small group of rating agencies perceive the political risk in a country.
A poor judgment of risk could see the entire investment lost in conflict countries or conversely, a major investment opportunity missed.
As managers and diplomats from Europe and North America struggle to understand the rapidly shifting political fortunes in Africa, Russia, India and Brazil have capitalised on this uncertainty with their firms investing billions of dollars in Africa.
Firms from these countries have invested close to $100 billion here since 2003.
In the past few months, Bharti Airtel made a splash by buying Zain's mobile phone operations in Africa for $10 billion.
Other Indian firms like Essar and Reliance are also making major investments on the continent.
Chinese firms have been investing heavily in the energy, mining and construction sectors.
However, as much as the adventurism of Chinese and Indian firms has continued to receive a lot of attention, attitudes among Western firms are starting to shift as witnessed in the emergence of a strong private equity sector in sub-Saharan Africa.
According to data compiled by the Emerging Markets Private Equity Association, sub-Saharan Africa attracted $1 billion in the first half of 2010, bringing the total investment in the sector so far to $1.9 billion.
Of the 10 funds that succeed in raising money through mid-year, only three were country-dedicated (two for South Africa, one for Angola).
The balance of funds are focused on regional strategies, most with footprints spanning a handful of markets.
Most are generalist in strategy, but it is expected that the focus sectors will continue to be energy and natural resources, financial services, and consumer goods & services.

Kenya not out of the woods yet

Kenya has endorsed a new constitution that seeks to unite the country, but it will take much more to ensure ethnic harmony, especially in Rift Valley region, where thousands were displaced in the election less than three years ago। "I cannot forget or forgive," said a resident of Naka camp in Yamumbi, near Eldoret, the main town in Rift Valley. "I came here naked after they took everything. In 1992 [when another election led to violence], they chased my father and took 10 acres [4ha] of our land." Asked if he thought a new law could help the local communities to move on, the man, who requested anonymity, said: "Only God has the power to forgive." Naka camp, which houses 870 people on 0.3ha, is home to members of the Kikuyu community who fled their homes in Nandi and Kapsabet districts during the 2007-08 post-election violence. The road to the camp meanders past lush maize fields that have grown over the remains of the occasional home that was destroyed. Most of the owners have never returned, with some choosing instead to rent houses in nearby townships. "Most of the people here were squatters or tea estate workers, and now have nowhere to go," camp chairman Reuben Kinyua told IRIN on 4 August, when the country voted on the new constitution. "We are waiting for government to relocate us, but it is taking too long. Now the population is too big for the camp, and life is getting increasingly difficult, especially for the children." Across the country, say aid workers, more than 300,000 people were displaced from their homes while 1,100 died after the disputed 2007-08 elections. Tens of thousands still remain in 19 camps, with Mawingu in the Rift Valley district of Nyahururu accommodating 3,000 households. "A lot of work has been undertaken to try and heal the communities," Eldoret South District Commissioner Alex Olenkoyo told IRIN at Gitwe school in Langas ward. "At the height of the violence, about 76,000 people were displaced here. In February 2009, that reduced to 47,000 IDPs [internally displaced persons] living in 21 camps here. Now, we are down to about 500 households. The peace committees in the communities have been effective, although some tension still exists, especially over land." Land tensions A local resident in Eldoret town told IRIN the tensions would continue until the land question was fully addressed. "We do not have enough land for ourselves," he said, requesting anonymity. "But there is enough land in Kenya for all of us - only if everybody could go back [to] where they came from." Laying the blame on Kenya's immediate post-colonial government, he added: "We have nothing personal against anybody, but we feel communities that were brought to occupy our land should be returned to their regions of origin. That way tensions will cease." Those tensions raised fears that violence could break out again during the 4 August vote. The advocacy group, Peacenet, identified 29 "hot spots", mainly in Rift Valley and Western provinces, amid reports that some communities were being threatened and people had already started leaving their homes. At least 15,000 extra police were deployed to the region to ensure peace, backed up by helicopters. The Interim Independent Electoral Commission, through its chairman Issack Hassan, warned that Kenya could not afford a repeat of 2008. "Given what happened last time, some people said it is better to move away till it is over," Information Minister Samuel Pogishio told IRIN in Eldoret. "But it was a small thing based on fear and driven by past experiences. Many of those leaving did not even carry all their belongings, meaning they expected to return soon." Election day passed largely peacefully, with one incident recorded in the "hot spot" Kuresoi area of North Rift Valley, where an unoccupied grass-thatched house was set ablaze on the eve of the vote. As voting progressed, the Kenya Red Cross Society (KRCS), which deployed a large number of volunteers across the region, said earlier fears of violence had not come to pass. "We have not seen movements that could cause alarm," Patrick Nyongesa, KRCS regional manager for North Rift, told IRIN. "There was general fear and a few people left. In Cheptiret, tension was sparked by rivalry between two boys, one Luhya and the other Kalenjin, over a girl. The matter was sorted out and all is calm." "National renewal" Rift Valley region voted largely against the new constitution, but about 70 percent of those who cast their votes nationally supported it, according to results released by the interim electoral commission on 5 August. "I voted for a new constitution because it is a new beginning for our country," said Margret Wanjiku, one of several displaced farmers living in Eldoret town, told IRIN after casting her vote. "I hope it can help the IDPs." Most support came from Nyanza, Northeastern and Central regions, where key political and other leaders backed the new constitution. "The historic journey that we began over 20 years ago is now coming to a happy end," President Mwai Kibaki said in an address to the nation on 5 August. "Let us all join hands together to as we begin the process of national renewal under the new constitution." The document upholds human dignity, equity, social justice, human rights, non-discrimination and the protection of those who are marginalized. It obliges the state to address the needs of vulnerable groups, and calls for measures to redress any disadvantage suffered by individuals or populations because of past discrimination. It also stipulates the right to adequate housing and reasonable shelter, and freedom from hunger. A date for the promulgation of the new document is to be announced. In the meantime, the interim electoral commission will publish the referendum results in 14 days. After the promulgation, parliament will be prorogued while top leaders will be required to take fresh oaths of office. In three months, parliament will form committees to implement the new law while another commission like the Judicial Service Commission will be set up. According to Solomon Dersso, senior researcher at the Institute for Security Studies in Addis Ababa, the new document will introduce some important changes in Kenya. It cuts the power of the president, beefs up the oversight role of parliament, vests the judiciary with the power of judicial review and introduces important checks and balances. It also seeks to devolve power away from the centre to the regions, creating two levels of government: national and county. Most importantly, it also promises to deal with the most contentious issue of land, and attempts to restructure various institutions, such as the Electoral Commission. Words of warning However, despite the upbeat mood across the nation, some leaders urged caution. "You cannot just go and tell people 'live together nicely, now forgive each other' when in fact somebody lost his parents or lost his land or business and yet nothing has been done about it," Bethuel Kiplagat, chairman of the Truth, Justice and Reconciliation Commission, told Reuters AlertNet. "We have to approach it through the healing of the individual and communities. If nothing is done about them - an acknowledgement, counselling, reparations - I am afraid the seeds of the next conflict are dormant, waiting to explode again."
IRIN