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11 October 2013updated 22 Oct 2020 3:55pm

What the Nairobi terror attacks mean for business

Biggest hit will be in the tourist sector.

By Elizabeth Stephens

The recent terrorist attack on an up-market shopping mall in Nairobi represents a backlash against African Union military operations targeting al-Shabaab in Somalia. Kenya’s participation in these operations has made it a target for Islamic terrorist groups operating in the region and the risk of reprisals has long been known to security authorities.

Political violence is not new to Kenya. The last large scale attack was the US embassy bombings in 1998 and there have been several small incidents since then. The 2007 presidential elections were punctuated by political violence and small protests and grenade attacks occurred in the run up to the 2013 elections.

While an al-Shabaab attack was anticipated, the nature of the attack is demonstrative of the evolution in terror tactics. Rather than a large-scale bombing, the attack was of the nature of “urban siege” and exceeded the 72 hours usually stipulated to constitute an “occurrence” in political violence insurance policies in relation to the application of the deductible. In response, we expect to see policy wordings evolve to reflect the changing nature of the terrorism threat, which highlights the importance of bespoke wordings.

Investors in Kenya and the insurance market had already factored in the risk of a terrorist attack. As such the market response has been limited and we expect to see political violence premiums for Kenya rise by a modest 10-15 percent.

The incident demonstrates the importance of effective intelligence services and well trained security forces. It would currently appear that the terrorists themselves caused limited physical damage and most of the destruction to Westgate was inflicted by Kenya’s security forces.  Hence it would be important for any wording to have coverage for loss caused by security forces trying to resolve any terrorism situation.

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The attacks will not alter the position of Kenya’s government on military operations in Somalia and to that extent the terrorism threat remains unchanged. In the short term they will enhance national unity and strengthen President Kenyatta’s political agenda. As leadership of the security forces is dominated by Kenyatta’s political allies, much needed reform is unlikely despite pressure from legislators and widespread media coverage of army misconduct.

Externally, the Kenyatta administration’s relationship with the US and other Western powers will strengthen over common security interests. This has already been demonstrated by the US Special Forces’ strike on an al-Shabaab base in Barawe, Somalia in an attempt to seize Abdikadar Mohamed Abdikadar “Ikrima” who is thought to act as the key link between al-Shabaab leadership and Kenyan groups. The attacks will also refocus international attention away from the trials of Kenyatta and his deputy William Ruto at the International Criminal Court.

Tensions will rise in Mombasa and in other Muslim dominated communities. These have long been present and subject to heavy police suppression. Security resources will be substantially increased along the coast, particularly the port city of Mombasa, the regions dominant commercial hub.

The biggest hit will be felt in the tourist sector, worth USD1.3bn in 2012, as many holiday makers opt for alternative destinations.  Violence in 2007-08 saw tourist numbers drop by 30 percent. Those conducting business in Kenya had, like the insurance market, already factored in the risk of a terrorist attack and the events at Westgate are unlikely to impact the perception of Kenya as an attractive investment destination. To that extent Kenya is unlikely to experience a significant downturn in foreign direct investment (FDI). The stock market has not fallen and the Kenyan currency has remained unaffected.

Financing of shopping malls will continue, albeit with more effective security. One of the largest shopping mall construction projects underway is the Garden City, a 130,000m2 mixed use complex which will be the largest retail centre in East Africa. The USD311 million project is funded by London-based private equity firm Actis and continues unabated. Private equity investors take a medium term view of five to ten years and with a sizeable middle class emerging in Kenya and the economy growing by around 6 percent a year, the prospects remain bright.

Nor does the attack undermine the prospects for Kenya to become an oil producing country. Oil is located in Turkana, the northern most region and is a battlefield where two Nilotic cultures have been involved in conflict for decades. Proximity to Ethiopia and South Sudan compounds the political violence factor and is demonstrative of the ability and appetite of business to confront those challenges.

If the intention of the al-Shabaab terrorists was to garner attention for their cause in attacking Westgate they succeeded, primarily because of the relentless coverage provided by the western media. If they intended to derail the Kenyan economy they failed as due to the resilience of international investors.