Foreign investors offload Sh1.8 billion T-bills

High interest rates are expected to attract foreign investors hunting for high yields to pump foreign currency, improving the demand of the shilling and as a result boosting its value.

CBK data, however, shows increase of the Central Bank Rate to 18 per cent did not attract voluminous in flows.

“The proportion in term of foreign investors is minimal which means efforts to support the shilling by raising interests to attract foreign direct investment are limited,” said Mr Musau.

The local currency weakened for the better part of last year to touch an all time low of 107 units to the dollar in mid October.

Non-residents’ investment rose from September last year when interest rates were on an upward trend from Sh243 million to Sh1 billion in December and further to Sh4.7 billion in March.

Foreign investors sold off 37.8 per cent of their portfolio of government securities between March and June, removing an important cushion for the shilling as falling interest rates made it unattractive to hold Kenyan Treasury bills.

Latest data from the Central Bank of Kenya (CBK) shows that non-residents’ portfolio of treasury bills fell to Sh2.9 billion in June from Sh4.7 billion in March. The period between March and June was characterised by a drop in interest rates from a high of 17 per cent to about ten per cent.

“With interest rates coming down, foreign investors had to consider reinvestment risks.

To continue earning significant returns they had to relocate their money to other markets or assets,” said George Kamau, a portfolio manager at ICEA Lion Asset Management.

The foreign investors’ portfolio shift is reflected in the slight depreciation of the shilling over the same period, which analysts say could have increased their urge to move their money from the country in order to avoid currency losses.

Foreign currency inflows help to stabilise the exchange rate and the international investors’ big sell-offs could have been the trigger for the shilling’s depreciation at the time.

“The move was to protect their capital because the shilling was weakening,” said Mr Kamau.

A weak shilling favours international investors entering the country but those exiting have to convert their shillings into foreign currency and are therefore exposed to currency exchange losses.

Some of the money from sale of treasury bills may have found their way into the stock market, whose low stock valuations represented bargain purchases for investors.

The average Nairobi Securities Exchange 20-Share index rose by 10 per cent during the period.

Data from the Capital Markets Authority showed that foreigners were net buyers in the stock market during the time, increasing their portfolio to Sh4.6 billion ($54.12 million) in June from Sh4.4 billion ($51.8 million) at the end of the first quarter of the year.

Between April and June the value of issued treasury bills dropped to Sh132.6 billion from Sh145.5 billion, indicating a resolve by the government to dampen interest rates by rejecting highly priced credit.

“The government was not borrowing as much as they had enough liquidity and they were rejecting bids to send a message that interest rates should come down,” said Eric Musau, an analyst with Standard Investment Bank.

The government received a syndicated loan of Sh52 billion ($600 million) in April which boosted the Treasury’s kitty and CBK’s foreign currency reserve balance.

The decision to go for an international loan was based on the high interest rates that were prevailing in the market at the time.