By Mutava mulei
It is unsettling that the NSE is getting ditched at the world stage, and the reasons are pretty basic. Someone else of more value has come around. The world of finance thrives on brute competitiveness and comparisons are the order of the day. To be ahead, one needs to be simply better than.
A quick look at the Capital markets quarterly statistical bulletins since 2020 reveals a grim picture of a steady rejection by international investors. For the three years, 2020, 2021 and 2022, there is a net outflow of funds from the bourse, with the largest withdrawal happening in 2020.
Indeed 2020 was a special year because of Covid-19 pandemic which denied the markets the much-needed revenue and, consequently what followed was foreign investors leaving. Barely three years later, there is nothing to smile about – the rebound is taking longer, and there are a mix of reasons for the drag, some of which are ‘foreign’. Unfortunately, others are our own creations.
One of the key drivers of foreign investments is the yield. Investors are drawn to high yield markets, and it is difficult to beat higher interests from developed markets holding all other things constant. Coming out of the pandemic, labour market distortions and global shocks such as rising oil prices created an inflationary environment, that elicited an unprecedented rise in interest rates.
The US for example has had an upward adjustment on its interest rates for more than 10 times since March 2022 reaching a 16 year high in May of this year. This is fodder for financial speculation and has a sweet-smelling aroma for international yield-chasing investors hence the flight from emerging markets such as Kenya.
More than the chase for yield, investors prefer markets deemed to be safe and low on risk during turbulent times. The war on Ukraine has had ripple effects on various facets of the global economy, necessitating a de-risking exercise for many investors.
Capital flight is aggravated by our own internal factors that eventually manifest in a weak, unstable exchange rate and low foreign reserves. Investors love predictability and certainty in the exchange rate (except for derivatives). If one is to get in and out of a market, there should be reliable estimates for how the currency will behave, especially for shilling-denominated assets. This is important to establish because a capital gain could easily be eclipsed by loss at the point of conversion.
In 2020, the shilling was trading at Sh101. Three years on, the value has slid by 40% to Sh141. This is a bitter pill to swallow especially for investors playing the long game in the market.
On the other hand, low reserves frustrate the urgency with which investors can get in and out of a market. Banks hold some liquidity to avoid a panic in the market. Likewise, investors need the assurance that should it be necessary to exit their positions, there shall not be a delay in the retrieval of funds because of dollar shortages. Internal inflation, drought and famine, and most recently political turmoil have a direct impact on the exchange rate and level of reserves.
Most of these internal factors could be addressed to restore the faith and confidence of international investors. For example, a political deal could easily boost the business environment in the country, and confer some stability on the exchange rate as well as the reserves levels. Aside from finding a solution to the current protests draining the country, to spur productivity and stop capital flight, it is important have a stable economy. Of course there are still investors who will go to other East African countries, including Uganda and Tanzania even if Kenya offers a stable business environment.
Another priority agenda is how to get out of the impending public debt risk, which if overlooked, will continue to poison the perceptions of international investors. This year alone, Kenya has faced credit status downgrade in quick succession from two reputable rating agencies; Fitch and Moody’s.
Latest rating by Fitch notes that sovereign external debt service (amortisation and interest) will rise to Sh610 bn ($4.3bn) in the financial year ending June 2024, including the Sh284 ($2bn) Eurobond repayment due in June next year. This means that the country’s ability to meet international obligations is in jeopardy.
If these payments are handled precariously, it could decimate our exchange rate and deal a hefty blow to the credibility of our market. Lest we forget, a shilling decline in the exchange rate augments the debt burden by 38 to 40 billion shillings. If ever you want to maintain a bride or a bride groom, communicate your plan with clarity and eliminate all uncertainties.
The sooner the government addresses the uncertainties around our macroeconomic variables, the better it will be for the NSE in terms of revenues especially from foreign investors.
Writer is a research fellow
