As another major terrorist attack has hit Kenya, companies should expect this not to be the last one in the near future. Terrorism is creating a growing sense of fear that is harming consumer-oriented businesses and tourism, a major driver of the Kenyan economy. However, despite causing disruptions and uncertainty in the short-term, rising insecurity will not derail Kenya from its path of economic expansion in the medium-term and companies should ensure that they maintain a balanced view of the impact insecurity will have on their operations, customers, and long-term plans for the market.

At least 48 people were killed when militants attacked Kenyan coastal Mpeketoni on June 16^th (Picture: Associated Press)

To put Kenya’s terrorist threat into perspective, it is important to understand the underlying dynamics that form the root cause for mounting volatility:

• Origins of the terrorist threat: Insecurity arises from political instability in neighboring South Sudan and Somalia. Since the Kenyan army’s military incursion into Somalia in 2011, there has been an upsurge in terrorist attacks on public places. The main threat comes from radical Islamist group Al Shabaab and homegrown Islamist militants.
• The tarnished tourism industry fuels volatility: Tourist numbers tumble every time a new attack hits the country, triggering a drop in prices for hotel rooms. This leads to a rise in unemployment and economic grievances in coastal areas, which creates a fertile recruitment ground for radical causes.

The Toll on the Tourism Sector
New travel warnings to Kenya’s major tourist areas issued by the US, Britain, France, and Australia could cause large job losses and shave off a 1.0% point of GDP growth. The sector accounts for more than 10% of GDP. The number of tourist arrivals already declined by 7.0% from July 2012 to July 2013.

• Weak governance exacerbates insecurity: In its fight against terrorism, the government is mistreating Muslims and has arrested thousands of mainly ethnic Somalis. Its behavior is fueling discontent.

However, despite rising insecurity, Kenya’s positive economic drivers will outshine the challenges: Terrorist attacks will cause sporadic disruptions but the vibrant private sector, rising consumer spending and Kenya’s important role as a hub for East Africa are strong economic drivers which are unlikely to be derailed by insecurity. FSG clients should review our recent report, Market Spotlight: Kenya, which covers Kenya’s medium-term macroeconomic outlook and provides strategies companies can implement to be prepared for a rise in insecurity.

Actions companies can take:

• Guarantee the security of your employees: Refrain from putting employees in international hotels or from holding marketing events in major hotels or malls, as these could become a target.
• Adapt to changing consumption patterns: Package goods for consumption activity at home, as consumers are more likely to consume at home because of security concerns.
• Maintain a balanced view: Carefully assess the risks stemming from terrorist activity to your business operations and demand for your products, as these may ultimately not be significant and should not warrant a decrease in investment in the market.