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Dollar crisis to worsen as foreign investors flee NSE

It was a rout at the Nairobi Securities Exchange (NSE) on Thursday, with nearly every index turning red after the US Federal Reserve approved a fourth-straight rate hike of three-quarters of a percentage point on Wednesday. 

The number of total shares traded dropped by 21.8 per cent, or 15,690,000 shares,  to 4,389,500.

The total value of wealth at the Nairobi bourse, or market capitalisation, again dropped below the Sh2 trillion mark to Sh1.99 trillion as the bearish market that started on Tuesday raged on.

The nosedive in equity turnover—the value of shares traded divided by their market capitalisation—continued dropping by a third as foreign investors sold off their shares for better-yielding assets in the US.

The NSE All Share index, NSE-20, and NSE-25 Share Index, on the other hand, dropped by 0.12, 1.6 and 1.53 points respectively. 

The local stock market is likely to take a major hit, with the volume of foreign outflows exceeding the volume of inflows.

Last week,  the volume of sales by foreign investors at the Nairobi bourse increased by 327.7 per cent to sh1.03 billion compared to Sh241.5 million in the previous week, according to a note from AIB AXYS, an investment bank.

The hike in interest rates is also set to aggravate the country’s dollar shortage crisis as foreign investors evacuate their capital from Kenya to a more stable US economy that is now offering improved returns for assets.

The country has been grappling with a dollar shortage occasioned by the lingering effects of the Covid-19 pandemic and the war in Ukraine, the latter of which has resulted in global supply constraints.

This has, in turn, pushed up the prices of such items as fuel, wheat, and palm oil. 

Central banks, whose main role is to stabilise prices, have responded by hiking their benchmark lending rates to avert a situation where there is too much money chasing too few goods and services.

The benchmark lending rate is the rate at which central banks lend to commercial banks that, in turn, lend to consumers in the economy.

While the increase in the benchmark rate means that borrowers pay more for the loans they take, depositors get more for their savings, a situation that has seen most US investors return their dollars back home.  

The supersized hike brings the central bank’s benchmark lending rate to a new target range of 3.75 per cent to four per cent, the highest since January 2008.

The Central Bank of Kenya (CBK) Governor Dr Patrick Njoroge has the rapid increase of interest rates in advanced economies such as the US is hurting emerging and frontier markets like Kenya’s.

“The policies that are being adopted in the advanced economies, for instance, the rapid increase in interest rates that we are now witnessing will have implications on the financial markets,” said Dr Njoroge in an interview with Bloomberg on September 21.

“At this moment, financial markets have indeed frozen us out. And it is difficult for us to maintain our relationship with the capital markets, borrowing et cetera,” added the CBK boss.

Kenya was forced to cancel its plan to issue a dollar-denominated sovereign bond amounting to Sh115 billion due to the high-interest rate in the market.

Kenya was expected to plunge into the international capital market to raise up to Sh280 billion from external borrowers to plug a budget deficit of around Sh900 billion in the current financial year ending June 2023.

The country’s reserves of foreign currencies have continued to decline, raising fear that the country might find itself in a financial crisis like the one facing Sri Lanka.

The International Monetary Fund (IMF) has projected Kenya’s foreign exchange reserves (forex) to fall below the four-month import cover for the first time since August 2011.

In what signals tough times ahead, the IMF projects in its latest regional economic outlook for sub-Saharan Africa that Kenya’s forex—assets held on reserve by a central bank in foreign currencies—will be enough to cover only 3.9 months of the country’s import needs by the end of this year, down from 4.4 months last year.

This is below the Central Bank of Kenya’s (CBK) statutory requirement to maintain at least four months of import cover.

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