NSE-listed firms dropped from Morgan Capital index over Kenya’s business climate

Sunday June 18 2023
Nairobi Securities Exchange.

The trading floor at the Nairobi Securities Exchange. PHOTO | NMG


Kenya’s fading attractiveness to foreign investments has hit another low after the American investment advisory firm Morgan Stanley Capital International (MSCI) Inc dropped the country’s listed firms from its latest index review plan over the worsening business environment.

Kenya, which is classified as a frontier market, joins a group of five countries (Nigeria, Egypt, Sri Lanka and Bangladesh) whose listed firms have been given a wide berth in MSCI’s latest index review plan over poor investment climate.

“In light of currently observed market accessibility issues, MSCI will not implement changes as part of this Index Review for any securities classified in Bangladesh, Egypt, Kenya, Nigeria, or Sri Lanka,” MSCI said in a statement dated May 11.

The latest comes amid reports that Kenya’s dollar millionaires are also fleeing the country as a result of growing concerns over-taxation, political instability and wobbling economic growth.

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Last August, MSCI which advises global investors on which countries to put their money, warned that it will not implement changes as part of ‘upcoming’ Index Reviews for any securities classified in Kenya after feedback from market participants on the deterioration of liquidity in the Kenyan forex market.


Thorough evaluation

The changes which inform MSCI’s index reviews include migrations between size-segments, additions of newly eligible securities, including sizable initial Public Offerings, numbers of shares and potential updates in Foreign Inclusion Factor — the proportion of shares outstanding that are deemed to be available for purchase in the public equity markets by international investors.

MSCI also warned that it will defer the implementation of corporate events not requiring a Price Adjustment Factor for Kenyan firms.

These include placements, block sales, recapitalisations, sizable IPOs and will exceptionally freeze potential migrations due to corporate events until further notice for the MSCI Kenya Indexes.

MSCI evaluates equity markets each year to determine whether they should be classified as a developed, emerging, and frontier or stand-alone market.

According to the firm the shortage of dollars in Kenya has continued to cause delays in foreign investors’ ability to repatriate capital.

“MSCI continues to monitor accessibility issues across several Frontier Markets. Certain Frontier Markets continue to be impacted by issues affecting foreign exchange trading,” the firm said.

“In Kenya, the queue for dollars in the foreign exchange market persists and continues to cause delays in foreign investors’ ability to repatriate capital. There is no offshore currency market. In addition, liquidity on the onshore currency market has been relatively low in the recent past.”

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They noted that while there are currently no additional documentation requirements that would impact the ability of foreign investors to repatriate capital, more time is needed to assess efficiency of the capital repatriation process.

Other constraints ruffling the feathers of foreign investors in Kenya include problems with investor registration and account setup as the process of setting up an account can take up to one week.

There are difficulties in accessing short-term overdrafts of less than one year from local financial institutions which have made clearing and settlement of transactions an uphill task and high cost of trading due to limited level of competition among brokers in the market.

Question of accessibility

In addition, foreign investors are facing operational concerns related to the use of omnibus accounts, absence of a central registry, with some registration done by financial institutions.

“In-kind transfers and off-exchange transactions are prohibited,” MSCI said.

The Kenyan shilling has lost over 30 percent of its value in two years falling to as low as Ksh139.62 against the greenback by June 14 last week from Ksh107.05 in June 2021.

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Last year, MSCI placed Kenya on a watchlist of troubled markets unfit for foreign investments, alongside Nigeria, Mauritius, Egypt, Sri Lanka, Brazil, Qatar and Ukraine.

MSCI Index tracks the performance of global equities, bonds and real estate markets and advises foreign institutional investors including pension funds which markets to invest in.

It also classifies markets into developing, emerging, frontier and standalone.
In its market review report published in June 2022, MSCI highlighted difficult investment conditions that have hampered foreign investments in Kenya.

These include dollar shortage, depreciating local currency, foreign capital repatriation restrictions and lengthy and tedious process of investor registration and account set up.

Kenya is classified as a frontier market and risks being downgraded to standalone market, the lowest classification characterised by hostile investment climate and polices that makes accessibility of the market impossible.

Frontier markets facing challenges include Nigeria, which has been adversely impacted by low foreign exchange compromising the ability of foreign investors to repatriate funds from investments in the local equity market and Sri Lanka which is also facing forex liquidity challenges amidst the ongoing domestic economic crisis.