While many Kenyans fear Thursday’s election re-run will provoke serious trouble, foreign investors are cautiously confident that the country’s debt can ride out the crisis, although they remain hesitant about local stocks. Their base scenario is that the vote can conclude largely smoothly.
However, given that Kenya’s external debt is rated B+ but trading at levels more akin to bonds with ratings two notches lower, this means assets have already adjusted to the uncertainty and any negative surprises may have less of an impact.
And Nairobi’s $1.5 billion stand-by facility deal with the International Monetary Fund provides additional comfort.
Kenya – East Africa’s largest economy– has slipped into turmoil since the Supreme Court ruling annulled the result of presidential elections in August.
Matters worsened when opposition leader Raila Odinga quit the re-run against incumbent President Uhuru Kenyatta.
“In the very, very near term ... with the ruling we had in September, the period of uncertainty was extended to up until this point,” said Diana Amoa, portfolio manager at JPMorgan Asset Management. “But the outlook going forward - once we get past this period - should be a positive one.”
Police clashed with opposition supporters on Thursday and group of youths prevented voting in some towns.
A handful of polling officials who pitched up to work in Kisumu, the scene of major ethnic violence after a disputed election in 2007, cowered behind closed doors, unable to distribute any voting material.
However, the government said the security situation was by and large “OK”, with polling stations open in over 90 per cent of the country.
For funds active in Africa and across frontier markets - a sub-set of riskier, smaller developing countries - the $55 billion Kenyan economy has been a firm part of their portfolios.
The country’s $2.75 billion in dollar-denominated bonds maturing in 2019 and 2024 form part of major emerging market debt benchmarks and frontier indexes.
Year-to-date, Kenyan dollar bonds have chalked up solid returns of more than 12 per cent compared with nearly 9 per cent on the index.
Blunted economic growth
However, the political stand-off has blunted economic growth in Kenya, which has been largely stable since the violence a decade ago.
Kenyan debt has still underperformed its peers, said Gabriele Foa, a strategist at Bank of America Merrill Lynch. He noted that yield premiums over US debt had not narrowed as much as those on other sub-Saharan debt.
“When you look at the spreads with Angola, Ghana, Nigeria, Zambia, that has been widening over this year,” said Foa, who has an “overweight” rating on Kenya’s dollar bonds. “We saw a compression in line with the region, but Kenya is definitely lagging.”
Still, investors are also upbeat on the local government bond market, worth 1,387 billion shillings ($13.4 billion). The Kenyan shilling has been broadly unshaken by the political events, softening just over 1 per cent since the start of the year.
Previous experience points towards the shilling bouncing back swiftly. When violence ripped through the country following the 2007 elections, the shilling fell about 15 per cent against the dollar, but recovered to pre-vote levels within three months.
Any softness in the currency, coupled with low foreign positioning overall in those assets, made local debt attractive, said JPMorgan’s Amoa.
Investors in Kenya’s $22.3 billion stock market have been more cautious. While the Nairobi Stock Exchange All Share Index has risen around 17 per cent since the start of the year in dollar terms, the gains fall well short of the 30 per cent jump across emerging equities more broadly.
“Foreign investors have been generally in wait-and-see mode with some net selling at the margin,” said Hasnain Malik, head of equity research at Exotix Capital.
The percentage of Nairobi-listed stocks owned by foreigners has edged down to 21 per cent in 2017 from a peak of 22.5 per cent in 2013. Yet those waiting on the sidelines may well be happy to return if and when the political impasse has been resolved.
“Kenya is the great hope for investors in Africa as a non-commodity producing country, which has the potential to industrialize ahead of its peers, with money going into railways, roads and ports,” said Daniel Salter, head of equity strategy at Renaissance Capital.
“It is a country that investors want to like, but what they don’t like is the current uncertainty.”