Developing countries in Africa are bracing for serious setbacks in their economies. One of the countries that may feel the effects of the downturn more acutely than others is Kenya, which suffered months of political unrest earlier this year. VOA Correspondent Alisha Ryu in Nairobi recently spoke to a number of experts about what challenges lie ahead for the largest economy in East Africa.
A decade ago, news reports about a global credit crunch might not have generated high anxiety among ordinary Kenyans.
Back then, Kenya's banking system mirrored that of many others on the continent, lacking liquidity and frequently criticized by industrialized powers for being excessively regulated. Tight controls on foreign exchange meant that banks here could not raise more money to invest in exotic Western financial instruments.
Kenya's financial market is far more open now, but it is still not comparable to those in the United States, Europe, or Asia. Julius Muia, the chief executive of the state-run National Economic and Social Council think-tank, says lagging behind the others may now prove to be an advantage for the country.
"The Kenyan economy is not connected that intricately with the U.S. economy or the European economy because we do not have derivatives in this market," said Muia. "Secondly, we do not have asset-backed securities in Kenya. Therefore, the effect that we see coming soon is what we call secondary effect."
Independent economists agree that Kenya, like many countries in Africa, will not be directly hit by the financial storm in the rest of the world. But economists worry that Kenya may be underestimating how those secondary effects could impact a country which began the year far from being financially sound.
In early January, opposition protests over the alleged rigging of a hotly-contested presidential election on December 30 triggered widespread ethnic violence. More than 1,000 people were killed and some 350,000 were displaced during two months of fighting.
The country's annual economic growth of about six percent began to slip as foreigners canceled trips. Agricultural activity came to a halt as farmers abandoned their fields and farms that export tons of fresh-cut flowers to markets around the world shut down amid the unprecedented violence.
At the same time, inflation soared and a food security crisis brought on by drought and rising fuel and fertilizer prices worsened.
Although the formation of a power-sharing government in April restored calm, the director of the Institute for African Development at Cornell University in New York, Muna Ndulo, notes that the political alliance remains fragile, as does the Kenyan economy.
He says any negative pressure on the economy has the potential to unravel the coalition government and fuel more ethnic tension.
"Clearly, if the economy is not growing and you have an unstable situation, it makes the situation worse because it means [you have] less resources to deal with the problem. It means unemployment increases and the lack of investment just makes that worse. So, one, of course, worries about the impact of all of this," said Ndulo.
According to the World Bank, only one percent of Kenya's $17 economy is dependent on foreign aid.
While that means Kenya and its 33 million citizens are not as vulnerable to the effects of reduced donor funding as other countries in the region, local economist Robert Shaw notes that the country is heavily dependent on foreign private investment and demand, particularly from Europe and the United States.
Shaw says a reduction in business and consumer spending in both places could translate to huge losses in Kenya. "Last year, our largest foreign exchange earner was tourism," he said. "It was very dependent on the European market and even though the number of visitors from the States [United States] were small, the actual money was quite high."
"What you have got now is that there are many potential visitors who are saying, 'Hold on, I have lost some savings. I am not feeling comfortable about spending money on a vacation.' Its linkage with the global economy is there. And we are one of the largest exporters of flowers and horticultural produce and you know, luxuries such as flowers are the first ones to get cut. We have got to be realistic and say we are going to be impacted. The looming recession that is likely to hit many countries could certainly come here," he added.
Economists suggest that the Kenyan government can cushion the blow of an economic downturn by adopting more liberalized policies that could significantly boost cross-border and regional trade.