Citibank sees political uncertainty hurting business in E. Africa

Financial analysts at Citibank are raising the red flag over rising political tensions that could undermine the value of investment across East Africa.

A general election is expected in Kenya in two years time while referendum on a new constitution will take place as soon as June this year.

That will be followed by presidential and legislative elections in Tanzania in December before Ugandans go to the ballot in a year’s time.

DR Congo will also hold elections in July followed by Zambia in November next year.

Mauritius, Nigeria and Senegal are other African countries due for the polls between now and 2012.

“From an investor’s perspective, political uncertainty in small emerging economies is an issue. One definition of an emerging market is a country in which politics matters as much as economics,” Citibank financial analyst David Cowan said in a report released last week.

However for Kenya, the analyst said there is potential for recovery driven by commodities in sectors such as horticulture, as well as business reforms.

Citibank, however, says that formation of a new government after elections does not mean that there will be significantly different economic policies.

“This relatively benign view of political developments in SSA does not mean that the rapidly approaching election cycle will not have an impact,” said the report.

Key component

Another investment bank, Renaissance Capital, in its most recent report on African markets holds similar sentiments.

“We think volatility will remain and that event-driven trading will be a key component of 2010 activity,” the analysts said.

But it also says that despite the concerns, the overall environment should be supportive of growth which in turn should impact the equities market positively.

It notes that equities started the year on positive note on the back of foreign investor inflows as well renewed buying from local institutions.

“We favourably view Kenyan equities in 2010 and expect the NSE to close the year in the black. Our view is supported by lower interest rates, sufficient domestic liquidity, single-digit inflation, robust economic growth.”

In Tanzania, Citibank says growth slowed down in 2009 to 5.5 per cent compared to 7.4 per cent in 2008.

The country’s most important export commodity is gold whose prices have been rising steadily since last year but has now stabilised at just below $1100 an ounce.

In Uganda, the bank reports that growth slowed in 2009 to seven per cent compared to nine per cent in 2008 but that it is trying to tackle food security issues just like Tanzania is doing with its Kilimo Kwanza (or Agriculture First) policy.

Coffee, Uganda’s most important export, is seeing rising international prices judging by the futures market at the New York Board of Trade.