The Inside Track to East Africa's Economies
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Terrorism and Insecurity: Breaking Down the Risks for East Africa Print E-mail
Friday, 05 March 2010
The threat of Islamic terrorism always makes for spectacular headlines, but is this really the risk that local corporates and investors worry about most?

Talk about how to address the growing terrorist threat in Somalia as well as the ongoing piracy issue at the Horn of Africa topped the agenda at the annual African Union summit in late January 2010. Spanish Prime Minister Jose Luis Rodriguez Zapatero, whose country currently holds the EU presidency, warned darkly that without international support, “Somalia could become a place that could destroy humanity.” AU Commissioner for Peace and Security, Ramtane Lamamra followed, saying: “The time has come for the world to look at Somalia in a similar way to the approach towards Afghanistan. It is as big a threat to global security.”

Insecurity in Africa has flickered on the international radar screen quite a bit in recent months. A large blip came on Christmas Day 2009, when a young Nigerian man attempted to explode an underwear bomb on a plane descending into Detroit. Then came raging religious violence that killed hundreds of people in Nigeria during President Yar’Adua’s chaotic absence. In January, there were also the riots protesting against the arrest and deportation of Jamaican cleric Abdulla al Faisal in Kenya. This all comes amidst continued speculation about the al Shabaab terror network’s activities in Somalia and links to al Qaeda. Meanwhile, ongoing drug running and people snatching in West Africa by al Qaeda in the Islamic Maghreb (AQIM) has compounded fears of a growing terrorist foothold on the continent.

All of these events are shaping perceptions of Africa and may indeed pose risks to business. Scary headlines, especially of the terrorist sort, are never good for investment. But the region faces a broad scope of security hazards: from terrorism and religious conflict, to political violence and good old fashioned crime. Often, these problems are lumped together, even when their causes and implications vary and disentangling them leads to a clearer risk assessment for business.

Defining the Threat

The potential for destructive terrorism in East Africa has long been apparent, first displayed by the bombings of US embassies in Kenya and Tanzania in 1998, and later with an attack on a hotel and airline at the Kenyan coast in 2002. Calls for intervention in Somalia’s long-running conflict reflect concerns that the country has become a home ground for Islamic terrorists who represent a growing risk to Kenya and beyond. But international efforts to end the conflict remain weak and ineffectual, hence the pleas at the AU for more to be done.

As long as Somalia’s chaos continues, piracy around the Horn of Africa will also threaten business. The costs have already been felt through global supply chains, although this is not greatly affecting decisions about whether to invest on the ground. However, feeble attempts to control money laundering in the region will mean that companies concerned about association with illicit cash will need to be more vigilant with due diligence. As for the current terrorist threat, there have been multiple bomb threats on local cafes and shopping malls in Kenya. Kenya’s police force is notoriously corrupt, and other parts of the security forces have also shown distinct lapses. But this does not appear to hamper day-to-day business: In Nairobi, your chances of getting mugged or car-jacked are astronomically higher than of being bombed, and in 2009, kidnappings have become a rising concern.

Crime remains a much bigger problem for Kenya, especially given high levels of incompetence and corruption amongst police forces. In the past year, businesses have come under growing threat of having their warehouses emptied by highly organised gangs. The recent discovery of 800,000 rounds of government ammunition stashed at a local businessman’s property in Narok was also disconcerting. Business needs to factor in costs for security, both for their business and possibly for their senior employees.

Nervous US
US travel warnings cautioning against trips to Kenya have long been considered overly sensitive and continue to irk the Kenyan and East African tourism sector. US American investors are skittish and generally prone to less informed views: The “crotch bomber” incident has skewed American perceptions of Nigeria, despite knowledge that the attacker studied abroad and was trained in Yemen. The high-profile trial of Tanzanian Ahmed Ghailani that began last June in New York hasn’t helped much either. Ghailani was hauled out of detention in Guantanamo to face charges of involvement in the 1998 embassy bombings.

On 12 February 2010, the US State Department released a “worldwide caution” warning that: “A number of al-Qaida operatives and other extremists are believed to be operating in and around East Africa. Americans considering travel to the region and those already there should review their plans carefully, remain vigilant with regard to their personal security, and exercise caution.”

Stephen Hayes, president of the Washington DC-based Corporate Council on Africa, says it may be too early to tell how the recent round of terrorism reports will affect American interest in Africa. But he thinks the US is “still behind the times in overall perception of Africa, and is still not separating one country from another”. We might expect to see “more US investment in the southern part of the continent and a lot more cautious approach as one moves northward.” However, for Americans who are attracted to East Africa, concerns about corruption and other risks presented by the Kenyan government still overshadow threats from terrorism.

Political Tensions
And not everything deserves the label terrorism: Violence seemingly associated with radical Islam often has more immediate domestic causes. The recent Muslim riots in Nairobi’s Central Business District (CBD) against the arrest and intended deportation of Jamaican preacher Al Faisal, previously imprisoned in the UK for hate speech, had little to do with Somalia’s al Shabaab venturing into Kenya. Rather, they were an expression of long-standing frustrations in the Kenyan Muslim community over the government’s involvement with extraditions and related human rights violations. Damages to commercial property, injuries and at least one death also resulted from inept police action in the unautorised demonstration that was quickly joined by hawkers and others.

Furthermore, the CBD riots were an expression of the overall tense climate that characterises Kenya following the violent aftermath of the December 2007 elections. An economic downturn, high youth unemployment, continued animosity in the grand coalition government and unresolved issues that led to the post-election violence mean that tensions can boil over quickly. And rather than the risk associated with radical Islam, it is politically motivated violence that is currently a more persistent threat:

  • Political and tribal disputes have escalated insecurity in Sudan. Despite the nominal end in 2005 to the civil war between Sudan’s mainly Muslim north and Christian south, high tensions – especially regarding control of oil fields – persist. Observers expect that this year’s general election and next year’s referendum on southern independence will incite violence. And even if the south secedes, intertribal clashes there are likely to cause serious problems for potential investors.
  • Fears of electoral violence are even more pronounced in Kenya, where memories remain sharp of the post-election violence in early 2008 that killed more than 1,000 people according to probably understated official figures, paralysed business across East Africa and led to huge losses in the Kenyan economy. The possibility looms of even worse violence breaking out around the 2012 election. In addition to day to day crime, this is by far the greatest security threat to business in the region and has inspired politicians elsewhere as it showed that there is at least a possibility of inclusion in the government if election results are contested by street violence.
  • Uganda is believed to be at some risk from Islamic terrorism caused by the presence of its troops in Somalia, but the political risk outlook is equally a headache: To a much smaller degree than Kenya, Uganda also suffered political violence during three days of deadly riots in Kampala in September 2009. Protests instigated by a power struggle between traditional leaders and President Yoweri Museveni were met with a brutal police response. Again, the readiness for violent street action reflected to some part growing frustration with Museveni’s unrelenting hold on power. There is a chance this kind of violence could recur going into the country’s 2011 election. Disputed land rights may add tensions, and the prospect of significant oil revenues generally raises the stakes in Uganda’s political contest.

Perspectives

Generalised perceptions from abroad of the various forms of insecurity have damaged new investor interest in Africa. A survey carried out in early 2007 by British insurance giant Lloyd’s and the Economist Intelligence Unit found that the threat of political violence was keeping 37% of companies from investing in overseas markets. Lloyd’s lumps politically motivated violence and terrorism together, while concluding that few companies actually understand either of these risks. The report finds that most businesses rely “mainly on international news coverage”. Reports on Kenya’s post-election violence were a good reminder that foreign coverage of Africa is often not very nuanced, so this can present a distorted image.

It is a different story, however, for corporates with an understanding of the sub-Saharan African market and for the local business community. While insiders say rising risks posed by Somalia have made the agenda at a number of board meetings in Kenya, the issue is not causing sleepless nights or breaking deals. Other executives say the terrorist threat really hasn’t crossed their mind, or come up in discussions with investors. For all kinds of businesses already operating in or looking closely at investments in East Africa, political and regulatory risks are paramount.

Political risk for Kenya has been more or less constant since it took a dive in 2008 with the post-election violence. FDI has been somewhat stagnant since then, but local business activity and tourism earnings have begun to recover. Still, as evidenced by crisis triggered by prime minister’s attempt to suspend two ministers, the grand coalition (Coalition Crisis in Kenya: More of the Same? ) is as dysfunctional as ever. And more violence is expected around the 2012 elections. This will lead to a marked slowdown in business in the year running up to the elections, and further disruptions to agricultural productivity and tourism could mean another GDP dip for Kenya post-2012.

Violence in Kenya is always bad for regional growth. But Uganda has seen a jump in FDI in recent years largely driven by successful oil exploration, and good PR has kept Rwandan investment numbers up. Mainland Tanzania prides itself on its lack of political violence and ethnic conflict and its gold reserves are an attraction, but its regulation-happy government remains its own worst enemy as far as investment promotion is concerned. This is, all in all, par for the course. Insecurity or no, investors with an appetite for risk will continue to take a long-term view and see the opportunities in East Africa and adapt their strategies and operations to the risk environment. Having a regional market also helps to diversify their exposure.

A Reuters special report from late January at the World Economic Forum in Davos found: “Investors with cheap cash needing to spice up returns in more obscure parts of the globe are asking whether Africa can shift from final investment frontier into the emerging market mainstream.” There are those who are simply not afraid of vicious governments or terrorists or pirates: Egyptian private equity giant Citadel Capital has already invested in both north and south Sudan and recently announced a major move into eastern Africa. The investment company intends to spend between USD200m and USD400m in the region in the next two years (EAC Regional: Citadel Capital Planning Beyond the Railway Tracks ). Citadel’s motto: you can’t scare us; we’ve seen it all before.

Many would say the EAC is almost on its way to emerging-market status, not the least because of the progress in regional integration. However, the risk of politically motivated conflict remains: Kenya has surprised many by the scale and ferocity of its crisis, and in Uganda, the lack of presidential succession planning is not only detrimental to good governance, but likely to lead to more tensions. Positively, however, concerned investors and business can now purchase political violence and terrorism insurance in the EAC. In the last two years, the African Trade Insurance Agency (ATI) has signed reinsurance deals with three local insurance companies, UAP Provincial in 2008, Jubilee in 2009, and APA this year, to allow them to provide coverage for political violence and terrorism. Humphrey Mwangi, acting chief underwriter at ATI, says there has been a “significant increase in demand for Political Violence and Terrorism & Sabotage cover across the region, not just in Kenya but also countries like Uganda and Rwanda.”



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