After terrorists were rooted out of the Westgate shopping mall, a group of dignitaries flocked to the site of the siege. One of the first to visit the shopping mall was Phyllis Kandie, the cabinet secretary for East African affairs, commerce and tourism.
After laying a wreath, she turned to the swarming media and declared: “The country is still safe for tourists.”
NAIROBI, KENYA – SEPTEMBER 23: Heavy smoke is seen from the site of the terrorist attack, Westgate Mall, on September 23, 2013 in Nairobi, Kenya. The attack occurred on Saturday, 10-15 gunmen from the extremist group Al-Shabab entered the mall and opened fire at random on shoppers; 68 deaths have been confirmed. (Photo by Gallo Images / Nation Media / Salaton Njau)
One day later, the country’s principal secretary of Kenya’s treasury, Kamau Thugge, emerged to assure investors of the country’s security. The officials’ sentiments reflected the uncertainty over the effects the attacks committed by the terrorist group, Al Shabaab, which left 67 dead and dozens missing, on the Kenyan economy.
While government spin doctors insist that the siege will not have any effect, analysts predict a slight dent on economic growth. The most immediate impact was the closure of stores in Westgate, which housed international brands like Deacons, Clarks and other businesses, such as banks.
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On a larger scale, global credit rating firm, Moody’s, predicts that Kenya’s economy will lose 0.5% of potential GDP growth this year. In an advisory to investors, the firm noted that the attack will affect Kenya’s growth and fiscal revenues, most directly through its effects on tourism.
This industry accounts for 2% of Kenya’s GDP and earned the country more than $13 billion last year, in addition to creating millions of jobs.
Moody’s could have been onto something. Barely a week after the siege, the governments of the United States, Britain, Australia and Sweden cautioned citizens against visiting Kenya, to the chagrin of Kenyan state officials who had pushed for the West not to do so. These countries account for half of the 1.7 million tourists who visited Kenya last year.
Kenya Defence Forces soldiers comb the rooftop of the Westgate shopping mall, on the fourth day since militants stormed into the mall, in Nairobi September 24, 2013. Somalia’s al Shabaab Islamist group said on Tuesday its militants were still holed up in a Kenyan shopping mall they attacked at the weekend and there were “countless dead bodies”, raising fears the death toll could be higher than 62. REUTERS/Noor Khamis (KENYA – Tags: CIVIL UNREST CRIME LAW MILITARY) – RTX13XVR
Kenya, which is known for exotic wildlife safaris and pristine beaches, is traditionally a tourism hotspot. The attack came at a bad time. The sector’s peak season is from July to December and many hotels and parks had hoped to benefit from the many bookings normally recorded in this period. After the attack, some have recorded cancellations as visitors adopted a wait-and-see attitude.
The sector is also still reeling from the election blues in March, when visitors stayed away due to fears of a repeat of the post-election violence that took place in 2008. Last year, the uncertainties over elections and the European economic crisis led to a 1.9% decline in the number of tourists.
The attack and any political instability brought about by the trial of the country’s president, Uhuru Kenyatta, and his deputy, William Ruto, at the International Criminal Court will hurt risk ratings, making it difficult to raise money in foreign markets. Any money that is raised will also attract higher interest rates.
Kenya plans to issue a $1.5 billion Eurobond this year to finance rail, road and port upgrades. The country has a favorable rating by various firms. For instance, Standard and Poor’s rating for Kenya is ‘B+’ stable and Fitch has graded it ‘B+’ positive outlook. Weakened by the terrorist attacks, the favorable rating is also being assaulted by politicians.
There have been calls by the Senate and the National Assembly to ratify a motion to pull out of the Rome Statute that creates the ICC, where Kenyatta and Ruto are on trial. Moody’s has warned that Kenya risks being downgraded from a stable rating of B1 if it goes ahead with this, signifying a higher risk for investors.
A lower rating may deter investors with plans to put their money in Kenya in addition to raising premiums that insurers charge for terrorism cover. George Otieno, the chief executive officer of Africa Trade Insurance Agency, an institution that insures investors against terrorism in different countries, told reporters that premiums are likely to go up for those taking terrorism and sabotage cover. However, he predicted that the costs will go down in the long run.
In addition to insurance, firms will also have to spend more on security by installing CCTV cameras, alarms and metal detectors. They will also have to train employees and arrange back-up for their data. All this will increase the cost of doing business.
The government, under pressure after analysts accused them of bungling the intelligence gathered before the attacks, is likely to increase spending on security and defense.
“This will have the consequence of raising the government’s gaping budget deficit,” noted Laura Chakava of investment firm Alpha Africa Asset Managers. Kenya’s budget deficit has grown from 6.5% of the GDP in the 2012/2013 fiscal year to 7.9% in 2013/2014, marking a 1.4% increase. This is against a target of 5%.
Though there are no reliable studies on the effect terrorism, like the Westgate attack, will have on the flow of foreign direct investment in Kenya, research by American scholars offers a glimpse.
In a paper published this year, Subhayu Bandyopadhyay of the Federal Reserve Bank of St. Louis, Todd Sandler of the University of Texas at Dallas and Javed Younas of the American University of Sharjah looked at how terrorist activity had impacted foreign direct investment (FDI) to 78 developing countries between 1984 and 2008. They noted that one domestic terrorist incident per 100,000 persons reduces net FDI between $323.60 million and $512.94 million for an average country. On the other hand one transnational terrorist incident per 100,000 persons reduces net FDI between $296.49 million and $735.65 million.
Kenya plans to attract $8 billion in foreign investments over the next five years.
However, both governments and analysts agree on one thing; the fundamentals of the Kenyan economy are sound. Unless other factors crop up, the attacks will only have a short to medium-term effect on growth.
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