AIB
AIB Capital
Argentina
Capital Markets Authority
Cytonn Investments
East African Community
EastAfrican
International Monetary Fund
Kenya
Moody
Nairobi Securities Exchange
NSE
Parliamentary Budget Office
Turkey

Kenya’s removal of share-ownership cap fails to attract foreign investors

Kenya has failed to attract increased foreign investment in firms listed on the Nairobi Securities Exchange despite passing a legislation that gives foreigners the freedom to acquire 100 per cent shareholding in these firms.

The EastAfrican has learnt that foreign investment on the Kenyan bourse has remained low even after the government lifted the 75 per cent ownership cap in July 2015, with listed firms grappling with poor financial performance and reduced earnings for shareholders.

According to NSE’s shareholder data released by the Capital Markets Authority, only 29 per cent of the 63 firms listed on the NSE as at September 30 are majority-owned by foreign investors while locals, who include investors from the East African Community member countries, control 71 per cent of the listed firms.

“It is imperative that we be cautious on external borrowing if we are to achieve long-term economic stability. Kenya seems to be borrowing to pay back maturing obligations,” said Cytonn Investments.

The EastAfrican has also learnt that worries over the possible contagion effect of the ongoing financial crises in Turkey and Argentina have dampened foreign investors’ appetite for stocks in emerging and frontier markets such as Kenya.

“The evaporation of confidence in the emerging market and by extension the frontier market is being propelled by market fear of the contagion from the Turkey crisis and the Argentina crisis spreading to the emerging markets,” said analysts at AIB Capital.

“The fear of Kenya falling victim to the same fate as Turkey, may have led foreign funds to sell securities no matter the fundamentals as most foreign participants view all emerging markets as a homogeneous group,” the AIB analysts added.

The Turkish crisis is characterised by deterioration in the value of the its currency, the lira, soaring inflation, ballooning borrowing costs and increasing loan defaults caused by the country’s excessive current account deficit and foreign currency debt.

It is feared that the crisis is likely to develop into a banking crisis if the lira, which has fallen by close to 40 per cent against the dollar this year, keeps on declining.

Moody’s argues that the country’s increased uptake of commercial loans to fund its persistent budget deficit is likely to put more pressure on the government’s cash flow making it difficult to repay its debts in good time.

The agency says sovereign bonds issued by frontier market governments such as Kenya will face a much tighter refinancing environment in coming years, affecting the country’s debt affordability and raising its debt burden, especially if the local currency depreciates.

According to AIB Capital, foreign investors have also taken into consideration the risk that the Kenyan shilling is currently exposed to after the expiry of the $1.5 billion precautionary facility with the International Monetary Fund, which was expected to cushion the economy against unforeseen shocks.

“We advise investors on the NSE to brace for the possibility that the sell off will continue in the short-term driven by foreign net selling,” said AIB Capital.

Kenya’s public debt currently stands at over Ksh5 trillion ($50 billion) and the Parliamentary Budget Office has estimated that 53 per cent of the Ksh562 billion ($5.62 billion) the country plans to borrow this financial year ending in June 2019, will come on commercial terms.

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