JOHANNESBURG, Jan 26 (Reuters) – Kenya’s economy is set to grow 5 percent this year and nearly 6 percent in 2013, boosted by better trade links in the region, provided political tensions remain in check, a Reuters poll showed on Thursday.

That would be a slight improvement on government estimates for 4.5 percent growth in 2011, a year when the economy was restrained by a severe drought that hit food and electricity production and caused widespread water shortages.

Economists also expect Kenyan inflation to plunge following a series of aggressive interest rate hikes from the central bank, responding to runaway prices and a near-25 percent collapse in the shilling in the first nine months of last year.

But escalation of any tensions ahead of elections scheduled for March 2013 would undermine the economy, especially if the situation threatens to descend into a repeat of the mayhem and bloodshed that followed a late 2007 poll.

“While a stable political environment has supported the implementation of economic reforms and the attraction of capital inflows since 2009, the upcoming elections could stir social unrest and stoke investor uncertainty and shilling volatility,” South African bank RMB said in a research note.

The elections now set for next year were originally scheduled to be held in August but have been pushed back. The government had proposed amending the constitution to delay them because of logistical problems.

Meanwhile, the International Criminal Court ruled this week that former Finance Minister Uhuru Kenyatta and former education minister William Ruto would have to stand trial in the Hague for directing the unrest in which at least 1,220 people were killed.

Kenyatta stepped down on Thursday and president Mwai Kibaki appointed Robinson Githae, a lawyer and cabinet minister for metropolitan development, as acting finance minister.

Economic analysts and traders said market impact was likely to remain limited, but the market would be closely watching to see if Githae is up to the task.

“Given the strength of Kenya’s institutions, this is unlikely to dramatically alter the outlook for fiscal policy, or near-term borrowing plans. As such, market reaction should be relatively limited,” Razia Khan, head of research for sub-Saharan Africa at Standard Chartered, said.

BETTER INTRA-REGIONAL TRADE FLOWS

In previous Reuters polls Kenya’s prospects have hinged more on the outlook for the euro zone, which is still battling through a sovereign debt crisis that has lasted two years and still threatens the currency union.

But that appears to be changing, with trade figures from the first seven months of 2011 showing exports to other countries in the region, exceeding those to traditional trading partners in Europe and the United States.

The World Bank said this month that more advanced trade links among East African countries has led to a relatively rapid expansion of trade within the region.

London-based risk consultancy Business Monitor International (BMI) said expansion of trade in east Africa’s recently established common market should be a major driver of economic growth.

“Improving domestic economic conditions and the robustness of regional trade partners underpin our expectations,” said BMI’s Matthew Searle, who like the consensus from the poll expects 5 percent growth this year.

INFLATION TO FALL SHARPLY

The poll also forecast inflation will average of 11.8 percent for 2012, easing to 7.1 percent the year after. The central bank is targeting 9 percent for the July 2011-June 2012 fiscal year.

Inflation peaked at 19.7 percent in November last year, forcing the central bank into an aggressive tightening cycle that pushed its benchmark lending rate up to 18 percent currently from just 6.25 percent in September.

The analysts forecast the shilling at 88.7 against the dollar at the end of the first quarter – in line with its current value. It was then likely to ease to 90.5 three months later and end the year at 90.0, the poll said.

“The overall pressure should be for shilling depreciation given the large current account deficit, slowness in bringing the fiscal deficit under control and rising political tensions,” Citi economist David Cowan said.

By Vuyani Ndaba, Reuters

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