Nairobi — Almost three days after Kenya's presidential and parliamentary elections, the Electoral Commission of Kenya (ECK) announced the result of the closest presidential race in the country's history.

The incumbent candidate, President Mwai Kibaki, campaigning on the ticket of the Party of National Unity (PNU) was declared the victor, having secured 46.7 per cent of the vote.

His main opponent, Raila Odinga of the Orange Democratic Movement (ODM) was said to have won 44.3 per cent of the vote. Both pre-election opinion polls and unofficial results reported by television had initially put Raila Odinga in the lead, triggering rioting and calls of fraud by ODM supporters when the ECK finally made its announcement.

Ahead of the election, the prospect of policy continuity under a Kibaki presidency, and concerns that the ODM might be tempted to institute more left-leaning policies, was expected to result in a relief rally following a PNU victory, then considered to be the more market-friendly outcome. Now, with the results out - but contested, and outbreaks of unrest in several parts of the country, that relief rally appears to be elusive. The deeper economic implications of recent events need to be examined.

A complicating factor, and a source of considerable downside risk to the Kenyan outlook, is the ethnic dimension of the recent electoral divide, with the PNU receiving much support from central Kenya's tribes, and the ODM appealing to Nyanza voter base.

The 2002 election, which resulted in a landslide victory for the Rainbow Coalition (NARC), which unseated KANU - the party in power since independence, was hailed as a landmark break from the tribalism that has often marred Kenyan politics. In that election, Kibaki and Odinga formed an alliance with broadbased support from both Kikuyu and Luo voters.

According to analysts, it was the Luo vote in particular - united behind Odinga - (unlike the Kikuyu vote split between Kibaki and KANU), that contributed to the landslide victory of the Rainbow Coalition. NARC's strong anti-corruption platform was another reason for the electoral success of the party in 2002.

But the coalition did not last long. Debate over the powers vested in the executive - in particular, failure to create a figurehead presidency, with the real power lying in a prime ministerial post that would have to be newly created (rumoured to have been offered to Odinga in return for his support in the 2002 election) led to a break-up of the coalition.

Defeat for Kibaki in a referendum to decide on a new constitution in late 2005, strengthened the new Orange Democratic Movement, and so the foundation for Kenya's current political split was established. Despite claims by each side to woo supporters across the ethnic divide, tribalism - and its attendant complications - appears to have returned to Kenyan politics.

The difference therefore is not just about support for one political party or another, and ODM supporters protesting the election victory of the PNU presidential candidate - the fault line runs much deeper than that.

Post-election reconciliation may be that much more difficult to achieve. Some level of public discontent with the previous government arose from its failed promise to tackle graft adequately - in a clear sign that new blood may be needed, almost half of the cabinet failed to get re-elected.

But a deeper undercurrent marking this election- and support for the opposition ODM - stems from the feeling in some quarters that policy under President Kibaki was aimed at consolidating a perceived central Kenya grip on economic and political power in post-independence Kenya.

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Local analysts have spoken of disaffection representing a 40 year grudge against perceived Kikuyu power, rather than a divide that was recently created, suggesting that a return to calmer conditions following the disquiet over the election result will not be easily achieved.

A conscious effort by Kenya's leadership to overcome mutual suspicions will be required.

While the vote itself passed peacefully enough, delays in the tally and announcement of the results by the ECK appear to have been responsible for much of the unrest that has followed. Although exit polls on Thursday had suggested that Kibaki was in the lead, critics say that fear of the power of the State would have prevented respondents from giving a correct indication of how they voted, implying that reliance cannot be placed on exit polls.

Television stations across the political spectrum in Kenya were quick to indicate a commanding lead for Odinga on Friday, raising opposition hopes of an election victory. Even initial results from the ECK, which at the time excluded Kibaki-strongholds such as the Central province, suggested a slight lead for Odinga.

However, as more votes were tallied, and the results announced, Kibaki came out ahead, despite confirmations that many of his government ministers had failed to get re-elected.

The slow pace of the official results announcement by the ECK led to opposition calls of fraud. When the final results were finally made public, Kibaki was sworn into office within an hour, despite the refusal of the opposition to accept the result, and Odinga planned to hold his own inauguration the next day.

Since then, the unrest has flared with attacks primarily on businesses owned by central Kenya inhabitants. A curfew has been imposed in several opposition strongholds, and security forces have been deployed to try to restore order.

So far, international reaction to the Kenyan election has been mixed. The United States has congratulated the winners, calling for calm and for Kenyans to abide by the results of the electoral commission.

EU election monitors have described the vote tallying process as 'lacking in credibility', claiming that despite the best efforts of the ECK, it did not fulfil its responsibilities to create such a process. The UK has expressed 'real concerns' about the irregularities reported by EU observers and others, calling on Kenya's political leaders and democratic institutions to work together to address these concerns.

With little seeming consensus amongst the donor community, it is still too early to predict what the impact on potential funding is likely to be. Kenya, long seen as a haven of stability in the East African region, and a key strategic ally of the west, is likely to continue to receive military assistance from the US. There are no grounds for believing that other donor financing might be at risk.

However, given that relations with the IFIs had only been restored recently, donor financing is in any case not yet at a significant enough level to matter. As a potential influence on the fiscal space for longer term development expenditure, it is of course important.

But with Kenya increasingly seeking to tap market sources of funding, it is private investor sentiment - domestic and foreign - that matters more to the economic outlook.

The implications of the election are therefore worth focusing on. Although the Kenyan economy has done well in recent years - President Kibaki had overseen an improvement in trend growth from 2-3 per cent to 6-7 per cent, the overall election results tell of a preference for change amongst the electorate, and perhaps an impatience that more should be done to tackle graft. A large number of cabinet ministers lost their seats in the recent election.

This is likely to deliver to President Kibaki a Parliament that has a significant opposition presence. Political reconciliation, in order to move the economy forward and achieve a lasting legacy of economic growth, is therefore necessary. Despite the powers of the executive, meaningful policy success will require the buy-in of Parliament as well.

An election result that is this close also indicates the electorate's newfound ability to demand change. The election controversy should not detract from this important point. In 2002, Kenya's ruling party - in power since independence - was defeated at the polls. In 2007, the electorate came close to demanding change again. This has implications for Kenya's entire political class - whichever the party in question.

There will be greater pressure all round for the Government to deliver on its election promises.

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Spending on infrastructure, key to the economy's long term turnaround, is expected to continue. Given the financing constraints already faced by a government with a projected deficit-to GDP ratio of 5.3 per cent in the 07/08 fiscal year, this means that privatisation - currently forecast to finance over half the projected deficit - must go ahead.

Safaricom IPO planned in the new year, tipped to be several times oversubscribed may restore some degree of positive sentiment following the election-related volatility, but improved investor sentiment will itself be a necessary precondition to the IPO proceeding.

Other election promises must also be examined in light of the fiscal space that exists to see them through.

Free secondary education has been another pledge of the PNU, and one that will now become necessary to encourage some restoration of calm. However, with a deficit that is already high (albeit easily financed), there are questions about its affordability.

In the absence of even more privatisation - itself dependent on investor sentiment - and perhaps cutbacks in the civil service - which will require political consensus - there appears to be little room for an increase in recurrent expenditure.

In 2002 the NARC Government was able to proceed with plans for free primary education even given significant delays in donor financing. But sentiment then was upbeat. Domestic investors were key to the economic turnaround then, and a domestic-led economic recovery, with rising domestic revenue collection meant that the absence of donors mattered less.

Now, Kenya is starting from an already-strong position, perhaps at the top of the cycle, with domestic investor confidence likely to be more muted in the months ahead.

The authorities will have to tread a fine line between higher spending, and preventing a domestic interest rate overshoot capable of damaging Kenya's upturn.

With plans for a maiden Eurobond issue in 2008 still believed to be underway, Kenya is expected to broaden its sources of financing - domestic interest rates need not bear the full brunt of planned increases in expenditure.

But with a new source of downside risk to contend with, that of domestic political instability, the settling of the domestic political dispute will be key to winning the confidence of international investors.

The stakes are high. There is much to play for. But equally, a lot of what Kenya has achieved in recent years could be put at risk, if political reconciliation proves elusive.

Events over the coming days will be key. Given the election-related turbulence, Monday December 31st was declared a public holiday, with Kenyan markets also closed on January 1st. Markets were closed over most of last week (from December 25th through to the 28th), so liquidity is expected to be thin, and this could give rise to volatile trading.

The Kenyan shilling has of course been appreciating significantly in recent weeks. But unless some measure of political calm can be restored soon, the Kenya shilling is likely to give up its earlier gains.

Previously, we expected a privatisation-related appreciation in the Kenya Shilling to 62 by the end of March, and to 61 by end June, as the usual end-fiscal year influences kick in. The telecoms IPO is still expected, and should still be oversubscribed, but sentiment is more precarious than was forecast prior to the election, and foreign inflows may not be as strong.

Rising domestic interest rates could prove a balancing force, providing some support to the shilling, especially as the deficit increases further in the near term.

Eventual appreciation of the shilling by the end of March is still anticipated. But clearly political developments between then and now, the likelihood of greater noise, and greater market volatility, could see dollar/shilling exchange rate head higher near term.

The starting point of the anticipated shilling appreciation would then be higher, but an eventual shilling appreciation remains on the cards. Just do not expect it to happen any time soon.

The writer is the Chief economist for Africa at Standard Chartered Plc.