Kenya's economy was last night left looking for leads on the direction it would take in the outcome of a constitutional referendum today, amid optimism a "Yes" win would boost investor confidence and cheer local currency and stock market.

The Kenya shilling and the stock market - two key indicators of the health of the economy - remained nervous but posted improved results on the back of growing optimism.

Business leaders and market analysts have endorsed the proposed laws, saying the document has the potential to put the country on a more stable foundation for long term growth.

A violent outcome, they warned, could hurt the economy, mirroring January 2008 when a disputed general election triggered political chaos.

Violence, they said, could shake the country's political foundation and culminate in downgrading of Kenya's sovereign credit ratings.

"The markets are nervous of the outcome," said Robert Bunyi, an investment analyst with Mavuno Capital.

"Irrespective of the results, an outcome that is devoid of any disruptive activities will be a confidence booster for both local and foreign investors, " said Mr Bunyi.

On Wednesday, the local currency strengthened against the dollar on the back of the growing optimism, dealers said, saying the movements of the shillings have over the past few weeks been driven more by political sentiments.

Commercial banks quoted the unit at Sh79 to the dollar compared to Monday's close of 80.15/25."What we are seeing are banks shedding off excess dollars in anticipation of the outcome of the constitution," said Kenneth Butiko, a senior dealer at the Bank of Africa.

"Going forward, we expect a stronger shilling especially if the constitution passes before going back to the fundamentals of demand and supply, " said Mr Butiko.

At the Nairobi Stock Exchange, most counters continued to record a rise in share prices.

The index closed Tuesdays's session at 4,591.04 points, from 4,494.78 on Monday.

"For the equities market, the impact of the outcome would be felt more in the long-term as there are other fundamentals that remain key such as the happenings in the Eurozone," said Mr Bunyi.

Strong institutions

The proposed constitution carries a raft of provisions with the potential of significantly changing Kenya's social, economic and political landscape, including a rise in the tax burden.

On Monday, 25 chief executives of leading firms, under the auspices of the Kenya Association of Manufacturers and Kenya Private Sector Alliance, endorsed the proposed law, saying it would create more jobs and steer economic recovery.

"The proposed law would create strong institutions to enable the markets to function properly and anchor a legal framework key for growth," said Prof Njuguna Ndung'u, the Central Bank governor on Monday.

The economy has shown signs of growth in recent months, evident in key sectors including agriculture, finance, and commodities export.

The economy grew by 4.4 per cent in the first quarter of the year compared to a growth of 5.6 per cent in the same period a year earlier.

Treasury is projecting a growth rate of 4.5 per cent in 2010 and analysts have raised their forecast from four to five per cent.

A successful conclusion of the vote would lower political risks while a negative outcome would offer the reverse, say analysts.

"The passage of the proposed constitution will provide the economy with an additional momentum as politics will take a back seat allowing the economy an opportunity to be the driving agenda," said Paul Mwai, the CEO of African Alliance Asset managers.