Kenya investors start to balk as violence spreads

By Carolyn Cohn - Analysis

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.