The weakening shilling amid a dollar shortage is putting Kenya’s allure to foreign investors at risk.
This comes as more investors have been selling shares in Kenyan companies than buying.
Morgan Stanley Capital International (MSCI), a New York firm that offers analytics and investment research to institutional investors, says dollar shortages compromise the ability of foreign investors to repatriate funds from investments in the local equity market.
“In Kenya, a major depreciation of the Kenyan shilling has led to a rise of foreign currency deposits, and ultimately US dollar liquidity constraints for foreign investors,” said MSCI in a report on accessibility of different markets to foreign investors.
The report also questions Kenya’s level of foreign exchange market liberalisation level, especially since there is no offshore currency market.
“In addition, liquidity on the onshore currency market has been relatively low in the recent past.”
The development, combined with the weakening shilling, comes at a time when foreign investors have turned net sellers at the Nairobi Securities Exchange (NSE).
They are seeking better returns in treasuries and corporate bonds in developed markets where interest rates have increased.
NSE, for instance, recorded an outflow of Sh2.34 billion in September with the Capital Markets Authority (CMA) saying this was partly due to foreign exchange challenges.
“This trend has been occasioned by a combination of factors, including the search for yield in other jurisdictions and foreign exchange administration pressures,” said CMA in a market soundness report released yesterday.
“This poses a major risk to the Kenyan secondary market as one largely driven by foreign investors declines and compromises the sustainability of intermediaries such as stockbrokers and investment banks.”
Foreign investors have pulled out Sh22.15 billion from the NSE since January, with February being the only month they bought more than sold.
The net selling in October was Sh2.61 billion, with the worst day being October 6 when net selling was Sh911 million, according to data from AIB-AXYS Africa, a stockbroking firm.
Kenya’s shilling continues to lose ground against the dollar while the foreign currency reserves shrink. One requires at least Sh121.38 to get one dollar, a record low and nearing 20 per cent weaker compared to where it was at the beginning of 2020.
Kenya’s dollar reserves have dipped to $7.286 or just enough to cover import needs for 4.11 months, according to CBK data.
This meets the CBK’s statutory requirement to maintain at least four months of import cover but has breached the East African Community region’s convergence criteria of 4.5 months of import cover.
The International Monetary Fund, in its latest outlook report for Sub-Saharan Africa, estimates that Kenya will by end of this year see its reserves fall to 3.9 months of import cover.
Global economic uncertainty worsened by Russia’s invasion of Ukraine and high inflation in western countries has served to strengthen the dollar which is seen as a safe haven asset.
CBK data shows Kenyans were holding onto a record Sh905 billion worth of dollar deposits in local banks as of July, being nearly a fifth more than in January, before easing to Sh895.3 billion in August.
The high dollar holdings have come in an environment where investors and importers struggle to raise foreign currency from the local market.
The MSCI assessment has an influence on the view of foreign investors over Kenya especially since it runs the MSCI index that guides how much money such deep-pocketed investors can put into a particular market.
Much like the NSE picks the best-performing listed companies to constitute the NSE 20-Share Index, the MSCI Index picks the listed companies that are deemed more investible.
Currently, Safaricom, KCB, Equity, EABL, Cooperative Bank, and British American Tobacco are on the MSCI index, giving them more visibility in the eyes of foreign investors.