Falling shilling, CGT drive investors from NSE to Nigeria and Egypt

Saturday June 13 2015

Brokers on the trading floor of the Nairobi Securities Exchange. Introduction of CGT in Kenya led to an outflow of money from the equities market. PHOTO | FILE |

Kenya has moved to abolish the capital gains tax on shares in a bid to stem out the outflow of investments from the stocks market.

Foreign investors have deserted the Nairobi Securities Exchange over the past month, with Nigeria picking up the spoils after a smooth political transition.

In his 2015/16 budget presentation on Thursday, Kenya’s Treasury Cabinet Secretary Henry Rotich proposed abolishing the 5 per cent CGT on sale of share and replacing it with a 0.3 per cent withholding tax on value sale transactions.

The inauguration of Muhammadu Buhari in Nigeria and the introduction of the capital gains tax in Kenya led to an outflow of money from the equities market in the first half of the year.

The Egyptian, Malawian and Namibian bourses recorded increased inflows, having experienced their highest dollar returns in the first six months of the year.

Since the start of the year, foreign investor sales at NSE have risen to more than $28.3 million, exceeding foreign investor inflows by 11.1 per cent.


Geoffrey Odundo, the chief executive officer at the Nairobi Securities Exchange said that Kenya has now given a boost to investors and its attractiveness as a financial investment destination.

“The exemption of shares from capital gains tax is projected to improve liquidity on the Exchange,” Mr Odundo said.

Nikhil Hira, a tax partner at Deloitte East Africa said the CGT on the sale of shares has created a lot of tension for the market, brokers and investors. 

READ: Capital gains tax choking African stockmarkets, experts now warn

“This is a positive move that should bring the NSE back to the glory it witnessed in earlier years,” Mr Hira said.

For the past five months, excluding February, foreign counters at the NSE have seen a net outflow. In May, $15.1 million was made from foreign investor sales at various counters. In January, the investors took out $2.7 million, $10 million in March and $674,574 in April.

The outflow has had a negative impact on the local currency as it creates higher demand for the dollar. The shilling has shed more than 5 per cent to the dollar this year, and is currently trading at Ksh97.10; three weeks ago, it hit a three-year low of Ksh98.

Explaining the outflow from the Kenyan bourse, a research note from Stratlink Africa said that the trends of the Nairobi Securities Exchange 20 Share Index and the Nigeria Stock Exchange 30 Index suggest that foreign investors could be trading off the two exchanges in order to maximise returns.

“The outflow underlines the investors’ search for better returns with the greatest beneficiary being the Nigerian Securities Exchange, which had initially seen investors leaving due to the uncertainty of the general election,” the note said.

Data from the Nigerian Stock Exchange shows a total inflow of $1 billion, and $1.2 billion in total outflow by foreign investors in the first four months of this year.

Daniel Kuyoh, a research analyst with Kingdom Securities, said the Buhari effect in Nigeria has seen increased dollar inflows to the Nigerian Stock Exchange out of the Kenyan stockmarket.

READ: Nigeria looks to Buhari to fight corruption, stabilise the economy

“Apart from Nigeria, these investors have also headed to Egypt and smaller bourses like Namibia and Botswana, where the dollar has not had a negative impact on the local currency,” Mr Kuyoh said.

As at end of May, the US Dollar Adjusted Total Return for Malawi, Botswana and Namibia Stock exchanges on a year-to-date basis was 16.2 per cent, 5.9 per cent and 5.3 per cent respectively; they were the top three among African stockmarkets in the first half of the year.

“Brokers that StratLink Africa reached out to say the bear run has been aggravated by an improved investor perception of Nigeria,” the research firm said in its monthly report.

Market analysts warn that the risk of capital outflows from the NSE remains high, because of Kenya’s stance with the CGT on equities, its depreciating shilling and a weak economic outlook on tourism and agriculture, some of the country’s key dollar earners.

Kestrel Capital chief executive Andre DeSimone said that Kenya’s stance on CGT has seen foreign investors opting for markets like Egypt that do not apply the tax on equities.

“We are seeing capital markets investment activities migrating from the NSE to other developing capital markets in the region that have more conducive tax regimes. In no modern frontier sub-Saharan African market is CGT applied to stock exchanges,” said Mr DeSimone.

Geoffrey Maina, an analyst at Old Mutual Securities Ltd, said foreign outflows can be linked to the CGT, which Kenya started implementing at the start of the year. “The lag in the momentum of net inflows and rise in outflows in the market is likely because of the increased tax burden,” Mr Maina said.

Maurice Wangutusi, a director at Deloitte East Africa, said the Cabinet Secretary did not indicate in his budget speech whether the withholding tax will be the final tax or an advance tax.

“When filing their self-assessment returns for the affected years, the owners of the shares will compute the capital gain and apply the CGT rate of 5 per cent on such gain then claim credit for the withholding tax deducted at source by the stockbrokers,” Mr Watungusi said.

Dollar returns for the NSE FTSE 15 index fell to negative 9.8 per cent in May as the shilling weakened.

Mr Kuyoh said most foreign investors felt that the NSE was overvalued, especially when it went up more than 5,000 points.

“We have seen a lot of profit-taking. Most of these investors have been reconstituting their portfolios outside the country. Because of the weakness of the Kenyan currency, the majority of these investors are seeing their portfolios dwindling in terms of dollar returns. The opportunity costs for holding onto their investments as opposed to withdrawing them is much larger,” he said.

“However, many investors had been waiting for the policy rate decision. Now that the Monetary Policy Committee has taken a decisive stand, the investors have a tool to use when they calculate their internal rate of returns as they can now price a premium on top of their investments. Because the volatility of the shilling will lessen, we are going to see a lot of more foreign investment coming in especially because of mergers and acquisitions,” Mr Kuyoh said.