Guest blogger: Philippe de Pontet, Africa Analyst with Eurasia Group

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With solid GDP growth, a diversified economy and one of the fastest-growing stock markets in the world, Kenya was supposed to be the poster child for booming African frontier markets heading into 2008. Instead, less than one month after a deeply flawed election reinstated Mwai Kibaki as president, the country has been plunged into political crisis, sporadic ethnic violence and economic decline with no resolution in sight.

The 27 December election in Kenya set the political crisis in motion, by tapping into resentment aimed at the dominant Kikuyu tribe and government corruption more broadly. There is a moderate risk (30%) that the current political stalemate will persist into the second half of 2008, undermining the governability of the country, and incapacitating Kibaki in the process. At this point, the most hopeful outcome for Kenya would be a power-sharing agreement brokered by mediator Kofi Annan that would bring the stalemate to an end—and unless this happens in the first quarter of 2008, the economic impact of the current standoff could be severe. More likely, however, is deep gridlock between the opposition controlled parliament and the Kibaki administration, blocking Kibaki’s agenda at every turn.

The much-anticipated Safaricom IPO and the sovereign bond issue will both be delayed (by several months or more), forcing the government to borrow more domestically to plug its 5.3% budget deficit. In this volatile climate, though, risk-tolerant investors betting on an eventual political resolution and on Kenya’s relatively sound fundamentals, may find opportunities amid the current crisis.

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