A persistent US dollar shortage in Kenya is discouraging foreign investors at the Nairobi Securities Exchange (NSE) even as the government’s increased appetite for borrowing from the domestic market pushing investors to Treasury bonds, which promise better returns.
“The stockmarket is down. There are lot of foreigners exiting the market mainly because of foreign currency issues, and initially because of the higher interest rates in the US.
‘‘There are also uncertainties of getting foreign investors to repatriate their money back home,” Paul Mwai, NSE’s vice chairman told The EastAfrican last week.
“On the other hand, the local institutional investors are shifting to Treasury bonds as the government is borrowing more from the domestic market and they could get a better return from bonds,” added Mwai, who is also the chief executive of AIB-AXIS Capital Ltd.
During the week ending February 17, yields on Teasury bills also looked up. Yields on the 364-day T- bills increased by 3.5 basis points (bps) to 10.6 percent, for the 182-day bills by 3.7 bps to 10.1 percent and the 91-day bills by 2.2 bps to 9.6 percent.
Last year, the NSE posted a negative return of 34.04 percent, eroding investor confidence in equities trading in favour of the relatively stable and high earning bonds, according to data from the Capital Markets Authority (CMA).
Now scarcity of US dollars in the economy has colluded to further squeeze the bourse.
According to the market regulator, the persistent interest rate increase by the Central Bank and the dollar shortage remain top risks, with a direct impact on the attractiveness of Kenya’s capital markets.
“The lack of adequate foreign exchange to enable foreign investors to take up capital markets products and repatriate returns has been highlighted as a key issue of concern by the capital markets industry,” the regulator said.
“This has been exacerbated by perception long lead times in investor onboarding especially in the opening of Central Depository System accounts and requirements to have a personal identification number.”
According to CMA, global investors are shying away from emerging and frontier capital markets as they chase higher yields in the developed economies.
High interest rates
Investors are worried that central banks around the globe, in a bid to tame persistent inflation, will raise monetary policy rates to almost four percent through 2023, an increase of more than two percentage points over their 2021 average.
“There will be declining foreign investor participation in frontier countries capital markets including Kenya as we enter 2023 until inflation is tamed followed by a normalisation of monetary policy,” the regulator said.
Kenya is facing difficulties attracting foreign inflows amid growing concerns by New York-based Morgan Stanley Capital International (MSCI) on the country’s deteriorating investment environment.
In its June 2022 market review report, MSCI highlighted difficult investment conditions that have hampered foreign investments in Kenya.
These include a dollar shortage that has made it difficult for foreigners to trade and stringent foreign capital repatriation restrictions, which demand that foreigners show certificate of foreign currency inflow before repatriating dividends and profit.
The worrying situation has been compounded by a depreciating local currency, which has weakened to as low as Ksh128 against the dollar.
President William Ruto’s administration is keen on using the stock market as a key platform for mobilising funds for infrastructure development.
CMA is working on a raft of new measures to revitalise investor confidence and boost activities on the stock market.
Amongst key recovery measures is a proposal to increase compensation for small and retail investors who lose money when stockbrokerage firms collapse fourfold to Ksh200,000 ($1,600) from Ksh50,000 ($400) to reduce their exposure to losses.