Kenya's economy seen resilient to mall attack, tourism apart

NAIROBI/MOMBASA Mon Sep 23, 2013 10:12am EDT

Residents look at the ongoing rescue operation at the Westgate Shopping Centre in the capital of Nairobi, September 23, 2013. REUTERS/Thomas Mukoya

Residents look at the ongoing rescue operation at the Westgate Shopping Centre in the capital of Nairobi, September 23, 2013.

Credit: Reuters/Thomas Mukoya

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NAIROBI/MOMBASA (Reuters) - Security worries are nothing new in Kenya and so the country is unlikely to see long-term investors pull money out after the deadly attack on a Nairobi shopping mall, analysts say.

However, the tourism industry - a big earner of foreign exchange - may suffer some damage, especially if governments warn their citizens from travelling to the east African country.

This weekend's hostage crisis, in which more than 60 people have been killed, is a sharp reminder of the threat from war-ravaged Somalia on the doorstep, but Kenya's previous encounters with Islamic militancy - in 1998 and 2002 - suggest the economic impact will be limited.

"It will hit investor confidence but having said that the areas which are most likely to be impacted are tourism and in the shorter-term consumer goods," said Joseph Rohm, a portfolio manager of African equity portfolios at Investec Asset Management in Cape Town.

"People are likely to stay away from the malls for a week or two, but the long-term structural story - the growth, regional integration, political achievements - investors recognize those and an event like this is unlikely to change those views."

Even though the ferocity of the assault was unexpected, Kenya had been bracing for some sort of attack since it sent its troops into Somalia in 2011 to help the fledgling government's war against the al Shabaab Islamic militant group.

Nairobi took the decision only after gunmen started kidnapping tourists at an Indian Ocean resort town near their porous border.

"Insecurity will remain a key business risk in Kenya. That being said, business will likely get back to normal in a relatively short period as Kenyans have become accustomed to attacks," risk consultancy Eurasia Group said in a note.

"Some near-term business interruptions and losses are a given, but a sustained economic shock is unlikely. The attack will end up being most costly for the tourism sector."

TRAVEL WARNINGS

Tourism is Kenya's second-largest source of foreign exchange after agriculture and accounts for just over 10 percent of GDP. It earned $1.2 billion last year and employs 150,000 in a country hard up for jobs, but the sector remains vulnerable to security threats.

The numbers of visitors to Kenya's beaches and wildlife safaris plunged in 1998 after al Qaeda agents blew up the U.S. embassy, and after Islamist militants attacked an Israeli-owned hotel and tried to shoot down an Israel-bound airliner in 2002.

Mindful of the impact, President Uhuru Kenyatta begged foreign governments not to issue travel warnings - advisories that usually mean higher insurance premiums for travelers.

Mohammed Hersi, chief executive of the luxury Heritage Hotels Kenya chain, predicted some fallout but said the industry was learning to get up and dust itself off faster with every attack.

"It is still too early to say whether it will affect us but it is not good when it comes to tourism," Hersi said.

"Terrorism is an international problem and Kenya shouldn't be treated in isolation. For countries which are claiming to be sympathetic with our situation and supporting us to issue travel advisories amounts to betrayal and double-speak."

No cancellations had been recorded so far, Sam Ikwaye, head of the coastal branch of the Kenya Association of Hotel Keepers and Caterers, said.

INVESTMENT STORY

In the last two years, investors chasing plump returns have been undeterred by frequent grenade attacks in towns close to the border with Somalia and in Eastleigh, a Nairobi neighborhood known as "Little Mogadishu".

The government is auctioning a 12-year bond on Tuesday worth 20 billion Kenyan shillings ($229 million) with a fixed coupon of 11 percent. It is also expected to issue as much as $2 billion in a Euro bond later in the year.

Analysts expected little impact on either issue, a view supported by the Kenyan shilling, which was barely changed at 87.25 against the dollar. The stock market lost just 0.3 percent.

Kenya held a successful election earlier this year, devoid of the violence that plagued the country after a 2007 poll, and political reforms being rolled out should defuse ethnic tensions.

It was also the main driver of regional integration in the five-member East African Community.

"If this is an isolated incident then the impact should be very marginal. If it's the start of a series of related attacks, it would be another story, but that does not look very likely at the moment," said Mark Bohlund, senior economist for sub-Saharan Africa at IHS Global Insight.

(Writing and additional reporting by Helen Nyambura-Mwaura in Johannesburg; Editing by Ed Cropley)

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