Kenya in 2015: Investor darling with serious political problems (3)

Part 3: Depending on the amount of natural resources found, oil and gas are likely to considerably strengthen Kenya’s financial muscle (more on this in Part 2), but Kenya also faces some serious challenges in the coming year.

Challenges

Kenya faces some serious political and security challenges that could derail the country from its positive trajectory. Kenya’s rapid growth has not resulted in an adequate reduction in poverty levels. The rich are growing richer, while the poor are becoming increasingly frustrated.

Rapid urbanization has caused housing prices in Nairobi to soar to New York City-like levels, leaving the city’s residents increasingly dissatisfied with their deteriorating quality of life. Industrialization hasn’t picked up fast enough, which means that there is no sector that allows the many unskilled workers to find formal employment. Coupled with rising terrorism, this is creating serious security challenges.

Radical Islamist group Al-Shabaab has been stepping up terrorist activity in the country, especially along the coast. The fierce response of Kenya’s government forces to security challenges exacerbates the problem of rising terrorism, as certain groups are increasingly marginalized, typically in the mainly Muslim coastal areas. Every time a terror attack occurs in the country, tourist numbers tumble, causing the shutdown of hotels and restaurants, and creating more unemployment. This provides fertile recruitment ground for radical terrorists.

Kenya is also susceptible to tribal tensions, and the country’s political leadership frequently exploits these tensions for political gain, contributing to volatility that could intensify rapidly.

While Kenya has many opportunities, and will be one of Africa’s most attractive markets in 2015, investors must not underestimate these risks. Although Kenya’s challenges should not deter investors altogether, they must still be taken into consideration when investing in the market.

As quickly as Kenya has risen this year, it could also quickly fall from favor should local and global dynamics change. In 2007 – 2008, Kenya, assumed at the time to be one of the region’s more stable democracies, was hit by post-election violence in which several hundred people died. Investors, surprised by the country’s rapidly deteriorating security and business environment, exited the market. The underlying tensions and political dynamics that led to the violence have to date not been addressed. Should Kenya once again experience internal disruptions, the country’s stability will depend mainly on the response of its political leadership.


This is part 3 of a series on Kenya in 2015. In case you missed it, read Part 1 here and Part 2 here.

For more insights on Sub-Saharan Africa, follow me on Twitter@anna_rosenberg.

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