Dollar shortage causing foreign investor capital flight, says CMA

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Foreign investors are shying away from Kenya's capital markets due to a lack of adequate foreign exchange to invest in securities at the Nairobi bourse and repatriate accrued dividends and returns, the Capital Markets Authority (CMA) has warned.

The capital markets regulator said yesterday that foreign traders have reported concerns about the inability to buy Nairobi Securities Exchange (NSE) products such as shares or repatriate returns owing to the forex headache.

This hurdle is a blow to President William Ruto's new government's efforts to attract much-needed foreign investment into the country's bourse and other sectors of the economy.

Foreign investors have previously dominated trade on the NSE providing large-scale demand for blue-chip stocks.

Reduced activity by foreigners will hurt capital inflow besides fees and commissions charged by stockbrokers and the bourse operator.

"The lack of adequate foreign exchange to enable foreign investors to uptake capital markets products and repatriate returns has been highlighted as a key issue of concern by the capital markets industry," CMA said on Monday.

In the three months to December, the authority said, the NSE market recorded a further foreign investor equity net outflow of Sh4.87 billion, from the net outflow of Sh6.97 billion a similar quarter earlier.

"Foreign investors decry the lack of foreign exchange to invest in securities and repatriate dividends leading to them shying away from Kenya's capital markets," it added.

CMA warned this is a double blow as foreign investors who account for a significant contribution to equities turnover had already been withdrawing from the Kenyan capital markets as they chased yields in safer jurisdictions.

"The lack of adequate foreign exchange is a key risk which further exacerbates the impact of emerging exogenous shocks which affect the attractiveness of our domestic capital markets," CMA said.

The new red flag aligns with earlier concerns by US lender JP Morgan, which on March 22 last year issued a client alert on Kenya saying that it was straining to complete some client transactions in Kenya due to dollar liquidity constraints.

"Clients are informed that due to ongoing issues with sourcing sufficient US dollars liquidity in the Kenyan market in recent days, client requests for repatriation of Kenyan shilling via JP Morgan's AutoFX programme may be delayed," said JP Morgan in the alert.

"Liquidity constraints may result in delayed execution and completion of foreign exchange transactions."

The assessment by CMA is a blow for Kenya which has been seeking to attract large foreign firms and boost capital flows.

The country last year launched its international financial centre in the capital Nairobi after years of preparation aiming to raise more than $2 billion (Sh248 billion) in investments by 2030.

The Kenyan hub was expected to model Nairobi as a financial district in line with existing financial centres in European, Middle and far East capitals.

Despite Kenya's relatively developed capital markets, 75 per cent of all business financing in the economy was from the banking sector, while the balance came from the capital markets, the Treasury said earlier, adding that the situation was not ideal.

Last year, manufacturers in the country had also complained that a dollar shortage was forcing them to buy the greenback at a premium to the Central Bank of Kenya's (CBK's) official average exchange rate.

The banking regulator, however, dismissed the possibility of a parallel exchange rate developing in the country, saying the market had enough dollars to meet demand from importers and corporates.

CBK said on Monday the foreign exchange reserves, which currently stand at $7,005 million (Sh868.62 billion) or 3.92 months of import cover, continue to provide adequate cover and a buffer against any short-term shocks in the foreign exchange market.

Retail dollar buyers are paying up to Sh134 per unit in Kenyan banking halls as the demand for the greenback continues to surge.

This is as the margin between the US dollar's printed rate by the CBK and the market rate for customers quoted by banks and foreign exchange bureaus continues to widen. The official shilling-dollar exchange rate published by the CBK stood at 124.39 units yesterday.

Firms are hedging against further weakening by stocking up on dollars or holding on tightly to their greenback reserves.

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