Nairobi Securities Exchange (NSE) is in a crisis attributed to the shortage of US Dollars in the foreign exchange market.
The EastAfrican has learned that exchange executives are concerned about the decline in the supply of the US currency, fearing it could affect foreigners who control more than 50 percent of daily trading activity on the exchange.
The latest development was fueled by the Russian Ukraine crisis amplified which has brought negative shocks to the global economy, with spillover effects in other economies, mainly manifested in commodity price increases.
“Obviously, it’s not good for foreigners. I think one of the reasons why Kenya is an attractive investment destination is that we have a liberal foreign exchange system where at least one can deposit and withdraw foreign exchange. So when you start having these kinds of restrictions, it affects the appetite of foreign investors in the market.
“But we hope this is only temporary and the situation will improve over time.” said Paul Mwai, Chief Executive of AIB-AXIS Capital Ltd and Vice Chairman of NSE.
“If this continues, it will affect the overall appetite of foreign investors for the local market. In fact, the bigger worry for foreign investors would be that the tightening could be a sign of a weaker currency being constrained. So foreign investors are concerned because people expect that the Kenyan shilling might lose value against the dollar. But I don’t think dollar unavailability could be a long-term problem,” added Mr. Mwai.
Foreign investor activity on the Nairobi Stock Exchange fell 57.73 percent in the three months to March to 54.88 percent for the three months to December 2021, according to data from the Capital Markets Authority (CMA).
According to the Markets Authority, NSE has historically had foreign investor participation in the range of 60 to 70 between 2019 percent and the first half of 2021.
“However, due to mounting global economic shocks, the market has suffered losses in foreign investor participation in recent months, with March 2022 being the lowest at 47.89 percent According to CMA
“This reflects the risk posed by increased capital outflows, prompting the Kenyan industry to act more strategically to raise its profile domestically.” to strengthen financial investors in the country. This has allowed countries like China and the US to remain resilient over the years.”
According to the CMA, the Covid-19 pandemic, the uncertainty surrounding the 2022 election and the seemingly difficult economic context are one Condition Main risks to stabilize the recovery of domestic capital markets.
Kenya manufacturers hoisted the red flag more than two weeks ago over the US dollar’s tightening in the economy, arguing that the move will ease the pressure on local businesses increase currency, which makes imports more expensive and further fuels inflation. The Kenya Association of Manufacturers (KAM) said the dollar crisis has strained relationships with suppliers, while competition for raw materials has intensified worldwide due to rising demand amid continued supply chain constraints.
The Kenya Bankers Association acknowledged the shortage of dollars in the market, and advised customers to warn banks much earlier in cases where large amounts of foreign currency are needed, so that lenders can obtain them from the market.
The lobby group The industry wrote this on strong dollar tightening demand in the market as companies pay dividends and meet their foreign supplier commitments in the wake of the strong post-Covid-19 recovery.
“However, the supply of foreign currencies continues to grow, supported by Earnings from the country’s main exports and strong inflows from remittances.
“We believe this will stabilize in due course en and the market will return to normal,” said Habil Olaka, the association’s chief executive, in a statement last week.
“Meanwhile, the industry is in constant communication with the central bank to ensure that the current imbalances are addressed as soon as possible to return the market to normality,” added Olaka.
The National Treasury said it would review the currency composition of its external debt to limit currency volatility that has caused the cost of its US dollar-denominated borrowing to rise by 2 percent in just under four months.
The National Treasury Department’s Director of Debt Management, Haron Sirma, told The EastAfrican that the proposal is aimed at reducing foreign exchange costs associated with exchange rate movements.
“On the external debt stock, we try r to bring the currency composition in line with the country’s foreign exchange holdings as much as possible,” Mr Sirma said.
“The characteristics of a country’s external debt by currency should reflect foreign currency inflows through exports, remittances, etc. ” added Dr. Sirma added.
This minimizes foreign exchange costs from exchange rate movements.”
The Kenyan shilling hit its lowest intraday level of 116 on Tuesday (April 26), according to data compiled by Bloomberg, 04 to the US dollar.
Kenya borrows externally in five major currencies, with the majority (67%) being in US dollars.
Others are the euro (19% ), the Japanese yen (six percent) and the Chinese yuan (six percent), and sterling (two percent).