Performance at the Nairobi Stock Exchange (NSE) has continued to record dismal results owing to the effects of slow economic growth. The World Bank and Treasury trimmed Kenyan economic growth to 5.4and 6 per cent respectively citing currency depreciation, weak revenues from key foreign exchange earners and high import bill. Consequently, the county’s credit rating outlook has been lowered to negative from stable by Standard &Poor’s and Fitch Ratings.
Kenya’s debt has been widening currently approximated at Kes 3 trillion ($3bn) or close to 52 per cent of gross domestic product. Though the debt is within recommended levels, concern arises at the high cost of refinancing due to the slow pace of return from recipients of these funds such as infrastructural projects, misappropriation and use in non-revenue generating areas such as recurrent expenses. Additionally, an increase in short term interest rate by the US will increase repayment cost of foreign debt adding pressure to the current cash flow woes.
In her latest public speech, Federal Reserve System’s chair Janet Yellen left no doubt about the committee’s intention to gradually hike interest rates by the end of the year. Maximization of employment and price stability are two conditions to drive the decision in any of the two remaining meetings of this year. However, a slide of the dollar to a two-month low owing to weak US data and company results is seen as a setback and may delay the hike.
Year to date, the Kenya shilling has lost 15 per cent against the dollar as the current account deficit widens and with shrinking commodity prices globally. A move by the Central Bank of Kenya (CBK) to tighten liquidity has offered a respite as the shilling strengthened to an average of 102 from a high of 106 against the US dollar. Owing to the high demand of the dollar by the government to service debts, the shilling will probably trade in the range of 103-105 to the dollar for the remaining part of the year.
Consumer price index inflation has remained in single digits although slightly above the government’s minimum target. In September, overall inflation rate rose slightly to 5.97 per cent pushed up by increased cost of housing, clothing, furnishings and accommodation. Volatility of the local currency is likely to be a sore point for consumer prices in the medium term.
Referencing the risk posed by instability of the global financial market on inflation, the Monetary Policy Committee (MPC) has retained the tight liquidity position adopted in June this year. As a consequence, interest rates have escalated resulting in expensive credit. Inter-bank lending rates have shot up to 26 per cent while short term risk free rate stands at 22.5 percent. The treasury expects the high returns on bills will attract foreign currency to support the weak shilling. Interest rates are anticipated to continue with the upward trend due to the current governments’ cash flow constraints in the short term. However, intent by the Treasury to source debt externally at a cheaper cost than locally will likely moderate the rates. The rolling out of M-Akiba- a mobile bond trading platform might enhance liquidity in the long run.
Generally, the stock market performs its worst when interest rates rise and bond prices decline. As such, high interest rates from government borrowing have shifted investment from equity to treasury bills and bonds which offer better returns. The NSE All Share Index (NASI)has corrected by over 25% this year hitting a 20-month low in mid-October of 135points.Investor’s wealth as measured by the market capitalization has dropped to Kes 1.9 trillion from Kes2.3trillion during the same period, eroding over Kes 400 billion in value.
The bearish performance has been attributed to rising interest rates, the weakening of the shilling and dissatisfactory financial results from listed companies. Foreign investors’ net inflows into the NSE stood at Kes 5.1 billion ($50mn) in the last two months of the fourth quarter, an indication of increased appetite in the stock market. In the nine months to September, the market recorded a net outflow of Kes 6.7 billion ($ 65mn).
The financial sector stability which is the most liquid at the bourse was put to question following a sudden action by the CBK to put Imperial Bank, a mid-tier bank, on statutory management owing to charges of malpractice. An assurance of the robustness of the sector by the regulators in the days following offered a reprieve as the market rebounded.
Over the medium term, the economic outlook is likely to remain depressed, characterized by high interest rates, a volatile shilling and high current account deficit. These prevailing factors do not bode well for the stock market which is faced with weak results from listed companies, profit warnings and stock price depreciation. However, investors can take advantage of the current valuation of high quality stocks with strong fundamentals, low price earning multiples and trading at huge discounts of their book value by building positions with expectation of good returns over the long term.
Written by Virginia Wairimu