Kenya investors start to balk as violence spreads

LONDON (Reuters) - Mounting violence in Kenya more than a month after disputed elections is making investors increasingly wary about the outlook for one of Africa's more developed markets.

The post-election turmoil, which has left 850 dead including two opposition legislators, could knock at least a couple of percentage points off the country's economic output this year, pressure the currency and delay a key privatization.

Investors were initially reluctant to write off Kenya, which enjoyed seven percent growth in 2007, after violence broke out over the December 27 re-election of president Mwai Kibaki.

With a B-plus sovereign credit rating, the country has benefited from a fascination for so-called frontier markets, the more undeveloped emerging markets offering higher returns and showing a lower correlation with now teetering global stocks.

Amid the chaos, Kenyan stock prices have lost 14 percent in January, compared with losses of only 7 percent in South Africa and gains of 6 percent in Nigeria, while the shilling has fallen as much as 15 percent.

Investors are looking again.

"For the first week or two, we were not too worried, but clearly it's taken a turn for the worse," said Stephane Bwakira, portfolio manager of the Standard Africa equity fund.

"The political killing, the other things that are happening, are going to start impacting company earnings. In the banking sector, there will be a rise in non-performing loans and defaults."

Bwakira said forecasts for Kenya's growth this year had been as high as 7-8 percent, but that this was likely to be lower by two percentage points.

Ratings agency Fitch has a similar view. The agency cut its outlook on Kenya to negative from stable this week, citing the deterioration in the country's political and security situation.

A benign scenario would see growth at 5 percent in Kenya this year, while the lowest of estimates puts it at 2 percent, Fitch said.

The African Development Bank in early December forecast pan-African growth of 6.5 to 7 percent in 2008.

SAFARICOM, EUROBOND

Kenya was expected to launch two international deals this financial year ending in June to shore up its budget position but these are now looking doubtful, analysts say.

The offering of a 25 percent stake in mobile phone service provider Safaricom, 60 percent owned by the Kenyan government, has already been delayed several times.

Kenya was also planning a debut $300 million Eurobond.

"They are both key financings in terms of this year's budget," said Stuart Culverhouse, chief economist at emerging markets brokerage Exotix.

"If they are not realized, that will have a fiscal impact at a time when growth may be weakening and tax revenues falling short. It's going to complicate the picture."

In better times, the Eurobond could expect to offer an even lower yield than a well-received $750 million deal launched last year by Ghana, which has the same rating and is now yielding 7.7 percent, from a launch yield of 8.25 percent.

"The Kenya deal is a bit smaller and it is a bit better known than Ghana, the yield should be a bit less," said Richard Segal, fixed income strategist at Renaissance Capital. "But if it were to come now, it would be at 50 basis points more."

Bwakira sees the shilling continuing to be affected by a drying up of tourism, and likely to trade around 72.50 per dollar, slightly below current levels, for the next few months.

RWANDA, UGANDA?

Analysts say the negative impact of the crisis in Kenya is already being felt in neighboring landlocked countries like Rwanda and Uganda, which rely on goods coming through the Kenyan port of Mombasa.

There is also some wariness about countries like Ghana and Angola, which also have elections this year.

"If you get a series of political events like that in Kenya, that could put a cloud over the continent and the much-talked about African Renaissance," said David Cowan, emerging markets strategist at Citi.

But the growth of sub-Saharan Africa as an investment destination has made investors more savvy, Cowan added.

"Investors very much look at these countries as individual countries. For example, interest in Malawi or Botswana is not affected by current events in Zimbabwe."

And as investors have learnt to differentiate, they may also transfer funds to other African economies, away from Kenya but not away from the region as a whole.

Nigeria is likely to be a beneficiary, while tourists will also look elsewhere in Africa.

Tourism is Kenya's top source of hard currency, earning it nearly $1 billion in 2007.

"South Africa is going to benefit -- you can still go to the beach and safari," said Bwakira.

(Additional reporting by Sujata Rao in London; Editing by Ron Askew)