Guest blogger: Richard Segal, Fixed Income Strategist for Renaissance Capital

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Kenya’s political crisis seemed under control earlier this month when protests lost steam and mediators arrived en masse. The immediate sell-off was short lived, Kibaki proceeded with cabinet formation and the legislature took seats to begin daily business. Meanwhile, Finance Minister Kimunya indicated the Safaricom IPO would go ahead as scheduled in Q1, and many investors began to hope a political compromise could be reached soon.

However, the lull was also short lived, resolution to the crisis proved elusive and the exchange rate has stumbled badly. At KES 63.5/USD, the currency is off 15% from pre-election levels and stands at an 18-month low. Furthermore, the outlook for the shilling remains bearish, and all natural holders have signalled an unwillingness to hold the unit. Some traders had expected the central bank to step in to damp volatility, but it has stayed away, perhaps not being willing to supply the market with “cheap dollars.”

Persistent currency volatility will have a detrimental impact on sentiment in other asset markets and continue to feed through to the real economy. Meanwhile, bankers have warned that non-performing loans could accelerate. Tourism and trade have suffered from the political instability but it won’t be long before the slump in business and consumer confidence becomes more entrenched. Regional contagion was initially limited to logistical sectors, but Uganda, Tanzania and other countries will not remain so lucky for long.

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