East Africa’s growing competition for foreign capital inflows has opened up regional stock markets to more international investors risking their day-to-day operations.
The growth and performance of regional bourses is at the mercy of foreign investors who dictate daily trading activities, but are more sensitive to domestic and global shocks.
The Nairobi Securities Exchange and the Dar es Salaam Stock Exchange are facing falling share prices due to massive selloffs by international investors who are liquidating their investments in emerging and frontier markets as a result of rising interest rates in the US and Europe, and the geopolitical tensions brought about by the on-going war between Russia and Ukraine.
Emerging and frontier markets are also seen as unattractive because of depreciating currencies, high inflation, increasing political instability and rising debt levels in the wake of Zambia and Sri Lanka having defaulted on their repayment obligations.
In May, Sri Lanka defaulted on its $12.5 billion outstanding Eurobond repayment for the first time as the country struggles with its worst financial crisis in more than 70 years.
In 2020, Zambia defaulted on its $42.5 million Eurobond repayment becoming the first African country to default on its debt during the Covid-19 pandemic.
According to Oxford Economics Africa, as the Fed tightens policy, bondholders are demanding higher returns for investing in emerging markets.
“The resulting high interest burdens will crowd out public investment by governments, such as the standard gauge railway and Julius Nyerere hydropower dam that are key priorities in the Tanzanian budget,” economists said.
The NSE is currently 58 percent controlled by foreign investors who have been net sellers from 2017 to 2021.
NSE data shows that foreign sales increased significantly in the first six months of this year, pushing trading to an all-time low valuation of 10 times price-to-earnings ratio, making it an ideal time for investors to buy shares.
Last month, the benchmark index fell below 1,700 for the first time in 20 years, indicating muted activity and free fall of prices on the 68-year-old stockmarket.
“I think there is a general sell-off by foreign investors. The trouble in Ukraine, the rise in interest rates in the US and also the default by Sri Lanka on its debt obligations are making foreign investors move out of the emerging markets into what they perceive to be safer markets,” Paul Mwai, NSE’s vice chairman told The EastAfrican last month.
The NSE recorded foreign investor participation of 60 percent to 70 percent between 2019 and the first half of 2021. But their activity at the bourse fell to 58 percent in June, from 64 percent in May this year, due to exits.
“Foreign investors were net sellers of equities over the period,” said Geoffrey Odundo, the chief executive of the NSE.
According to the 2021 DSE annual report, equity turnover fell by 82 percent to Tsh104 billion ($44.44 million) last year, from Tsh591 billion ($252.57 million) in 2020, largely due to the impact of the Covid-19 pandemic and the decline in foreign investor’s participation.
The majority of investors on the Rwanda Stock Exchange are domestic investors at 93.22 percent, followed by other East Africans at 5.7 percent and international investors at 1.08 percent
In 2015, Kenya abolished a 75 percent restriction on foreign shareholding in listed companies allowing 100 per cent ownership of a listed firm.
The amendment to the Capital Markets (Foreign Investors) Regulations allowed the Treasury Cabinet Secretary to prescribe the maximum foreign holding in an issuer or listed company that is considered of “strategic interest”.
In 2014, Tanzania lifted restrictions on foreigners owning more than 60 per cent of companies listed on the DSE. The move opened up the shareholding of some of the country’s biggest and profitable firms to non-Tanzanians, resulting in increased foreign inflows to the DSE.
In Rwanda and Uganda, investors can own as many shares in listed companies as they want.