- Despite increased market volatility compared to the previous quarter, the outflows remained relatively low, under one percent.
- To address liquidity challenges, the Capital Markets Authority plans to collaborate with key market stakeholders.
- Increase in interest returns from Government securities continues to shift investments away from the domestic equities market.
Foreign investors in Kenya cut their equity outflows in the capital markets by $87 million in the three months to June as the market showed signs of gradual recovery from the impact of high interest rates and global shocks.
In the quarter, foreign investors withdrew $10.5 million, a significant decrease compared to the $98 million net outflow seen in the first quarter. Despite increased market volatility compared to the previous quarter, the outflows remained relatively low, remaining below one percent.
In Kenya, there are still some risks associated with foreign investors’ flight, said Luke Ombara, the Director for Policy & Market Development at the Capital Markets Authority (CMA). He, however, added that there is growing optimism that domestic investors are stepping up their participation in the markets.
“We have 44 percent contribution of foreign investors in the capital markets this is from the highs of 60s and 70s, there is a growing optimism that domestic investors are taking up a role in the Markets,” said Ombara.
June records first inflows
A noteworthy development in June was the first net capital inflow observed since February 2022, totaling $794,431. Foreign investors have been exercising caution due to debt distress issues across African markets, including Kenya. Subdued market sentiments are gradually diminishing interest in equities markets in Africa.
During the release of the CMA Soundness Report for the second quarter, Ombara cited persistent market challenges, such as timely repatriation of income and access to foreign exchange.
To address liquidity challenges, the markets regulator plans to collaborate with key stakeholders to encourage greater domestic and foreign investor participation.
Proposed measures include the issuance of Project bonds, Green Bonds, and Islamic bonds. Together, these offerings will serve as alternative financing vehicles for specific government projects. Additionally, CMA is working on an SPV (Securitization) Framework for county issuance of bonds. This project is in partnership with other development partners.
Learning from experience
The report emphasizes CMA’s commitment to learn from other African countries’ experiences to create a facilitative regulatory regime. Overall, CMA aims at positioning Kenya as the premier commodities trading hub in Africa.
CMA Chief Executive Wycliffe Shamiah said that the second half of the year will see significant activities in the secondary bond markets. Top among them will be the introduction of CBK’s new infrastructure DhowCSD starting on July 31.
Notably, investors continue to focus on a select few companies. These include Safaricom, Equity Group, the East African Breweries, KCB Group, and the Co-operative Bank of Kenya. Collectively, these firms control 67.8 percent of the market. However, this market share is declining from the 71.97 percent they held in the first quarter of 2023.
Risks facing capital markets
According to the report, Kenya’s recovery from Covid-19 pandemic has been significantly hindered by climate change-induced financial distress. This underscores the urgent need for both private and public sectors to prioritize investments in climate mitigation.
The sustained increase in interest returns from investments in Government securities continues to shift investments away from the domestic equities market. It further makes corporate debt market too expensive for potential corporate debt issuers. This is because pricing is usually benchmarked on Government bond yield.
Further, persistent rise in interest rates will impair the mark-to-market value of debt instruments held by commercial banks and pension schemes as investments.