January 7 2008: 3:20 PM EST
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Kenya's stability in the balance

The country's economy could lose hard-won ground if political tensions aren't resolved quickly.

By Alex Halperin

Nairobi, Kenya (Fortune) -- After doubts over the accuracy of presidential election results in Kenya sparked riots and disrupted transportation, analysts say the country's economy can recover - provided there is a swift political resolution to the crisis.

Incumbent president Mwai Kibaki beat opposition candidate Raila Odinga in the Dec. 27 election. However, observers have criticized abnormalities in the vote-count process and both sides have launched accusations of rigging. Since Kibaki returned to the State House, hundreds have died as violent protests destroyed homes and livelihoods, while diplomats from Africa, Europe and the United States have pushed for a resolution.

The business community hopes to see the country go back to work and resume its strong economic growth, five percent annually during Kibaki's five-year tenure. But the election and ensuing violence have tarnished Kenya's reputation as a stable haven nestled between flashpoints like Ethiopia, Somalia and Sudan.

"Kenya has been doing well for a nation that doesn't have much in the way of resources," says Mark Bellamy, a former U.S. Ambassador to the country and a senior resident fellow at the Center for Strategic and International Studies. However, it will be "difficult for the country to rebound" if the ruling party rejects calls for a negotiated settlement, after widely cited problems with the vote counting.

Razia Khan, head of Africa research for the London-based bank Standard Chartered, says she still sees a good future for the Kenyan economy, especially since it has become a crucial to growth in neighbors like Uganda and Tanzania. Kenya watchers, she says, have seized on hopeful signs like Attorney General Amos Wako calling for an investigation of the election results. Standard Chartered estimates Kenya's 2007 GDP growth at 6.7 percent.

Roadblocks to growth

With slogans like "You know him," President Kibaki based his reelection bid around continuing the country's economic growth, although many Kenyans remain in the starkest poverty. Throughout the campaign, opposition candidate Raila Odinga, who named his son Fidel after the Cuban dictator, perpetually reassured the business community of his suitability.

More than a week after the election, the biggest obstacle to getting the economy back on track remains transportation. Kenya's status as a regional power depends on the goods and fuel it sends to neighboring nations. Its port at Mombasa is the largest in East Africa. Over the last week, fuel shortages have hit provincial Kenyan cities and Uganda as roadblocks manned by armed gangs have made overland travel far more dangerous.

A peaceful settlement in Nairobi won't necessarily bring an immediate end to the makeshift roadblocks and truck drivers will remain easy targets for harassment and beatings. Randy Fleitman, an economic official at the U.S. Embassy in Nairobi, says even big American firms like Coca-Cola and Del Monte are reporting problems transporting goods and workers. But low mobility is "the killer for the small firms, the Kenyan firms."

Like many African countries, Kenya has shown impressive growth in recent years and, compared with its neighbors, it boasts strong infrastructure and foreign investment. It owes much of its growth to consumer spending and developing industries internally, an entrepreneurial advantage over countries like Angola and Zambia where finite resources like oil and copper are the economic drivers. Economies based on such commodities have downsides like environmentally taxing extraction methods and are susceptible to shifts in commodity prices. Kenya has become a leading exporter of cut flowers to Europe. Northwest of Nairobi in the Rift Valley, immense greenhouses and company housing line the road leading to the popular resort of Lake Naivasha.

There are other reasons to remain optimistic. The country is well established as the region's manufacturing hub. A large and well-educated English-speaking population makes Kenya a potential market for call centers, should the IT infrastructure improve. Tourists crowd its magnificent beaches and wildlife reserves, and so far there have not been reports of rioters targeting tourists or damage to tourist facilities. However, a group representing large British tour operators has suspended outbound trips until at least Jan. 7. It's a symbolic blow to this vital sector. If Kenya is believed to be unsafe, visitors may instead visit neighboring Tanzania, which offers similar attractions.

Kenya also has a large multinational presence. Shell (RDSA) has 131 gas stations here. And Barclays (BCS) is one of several international banks with a large retailing operation. Neither company would discuss how the riots have affected their operations. In 2006 a General Motors (GM, Fortune 500) venture built 1,755 Isuzu trucks and busses at a Nairobi plant.

Still it's easy to exaggerate Kenya's wealth. A 2001 estimate put unemployment at 40 percent and per capita annual GDP is around $1,200. Nairobi has a modern and clean downtown, but it's only fifteen minutes by packed minibus to the filthy slum of Kibera, where perhaps 1 million people live. One of the largest shantytowns in Africa, many residents have limited or no access to electricity and clean water. As a center of opposition support, much of Kibera has gone up in flames since the election. Many rural areas of the country don't present as squalid a picture as the rivers of trash in Kibera but offer even less opportunity to find work.

Keeping money in Kenya

On Jan. 2, the first trading day after the election, the Nairobi Stock Exchange lost about 5 percent of its total market cap to close around $12.3 billion (less than Starbucks). But with plenty of traders sitting home, trading was light and analysts say the drop doesn't necessarily represent market sentiment. Trading was suspended Thursday amid fears for employee safety. In response to the crisis, Standard & Poor's downgraded Kenya's currency rating.

At the end of 2007, investors here were anticipating two big deals. KenGen, the leading utility, planned to raise $1 billion to fund increasing electric capacity. The largest telecom, Safaricom, which is partly owned by British giant Vodafone (VOD), expects to sell a stake in an IPO that could be the largest ever in East Africa. Whether these deals go through should be a good measure of investor confidence.

Fleitman of the U.S. Embassy says Kenya's relative prosperity and status as a center for foreigners and finance stems from its wonderful climate and the perception of political stability. Kick out one of those assets and the country could be in for a slide. "They need to fix this thing quickly," he says. To top of page

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