Strategy Note /

Kenya: Al-Shabab attack a reminder of the risks

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    6 January 2020
    Published byTellimer Research

    Al-Shabab's attack on the US-Kenya military base, Camp Simba, on Manda Island in the Lamu region, resulted in the death of one US military service member and two contractors, as well as damage to six civilian-operated aircraft (according to US military statements). The militant group, based in Somalia, has conducted attacks in this region of Kenya and has a history of attacks on civilian targets in urban and tourist areas.

    Al-Shabab represents an ongoing external security risk to Kenya and although the US has systematically increased its kinetic military actions against the group (a rare example of increased use of military force under President Trump), this attack suggests that Al-Shabab remains a material threat (particularly should it again target softer civilian sites). 

    Tourism directly accounts for c4% of Kenya GDP (indirectly, perhaps double this figure) and the Lamu region is the terminus for the much-delayed but huge (cUS$25bn) pipeline of projects (spanning oil, transport and tourism in South Sudan and Kenya) under the LAPSSET Corridor.

    Our existing view of Kenya is cautious, on the basis of a range of economic and political risks and high equity market valuation relative to history – we recap these below.

    [Note that it is highly unlikely there is any direct connection between escalation in the conflict between the US and Iran and this Al-Shabab attack. Al Shabab is a Sunni jihadist group historically close to Al Qaeda, not Shia Iran. Indirectly, though, smaller-scale US military assets globally may be viewed by militant opponents as more vulnerable in recent years (following Obama and Trump’s unwillingness for new large scale deployments) and Trump's current focus on Iran.]

    External insecurity (Al-Shabab) adds to our existing caution on Kenya

    • Internal splits in the ruling Jubilee coalition: Vice President William Ruto's candidacy for the 2022 election (President Kenyatta will hit his term limit) is proving openly divisive, with the formation of The Service Party the most recent public repercussion, following the apparent use of the anti-corruption campaign to target Ruto supporters).
    • Twin deficits and an overvalued FX rate: According to IMF forecasts and estimates, the current account deficit will average 4.6% over 2020-21, the fiscal deficit will average 6.4% over 2020-21, and the FX rate is c20% over-valued.
    • Nairobi real estate slowdown: Prices in Nairobi real estate (a recipient of external documented and undocumented capital inflow) have levelled off, office vacancies have increased and mall traffic has reduced over the past 18 months. 
    • High equity market valuation relative to history: MSCI Kenya (Safaricom, the larger banks and East African Breweries) is on a c50% and c25% premium to the 5-year median trailing price/book and price/earnings, respectively. This follows the recent rally prompted by the effective repeal of the lending rate cap.