PineBridge warns capital gains tax to halt NSE bull run

Kenya’s largest wealth management firm, PineBridge Investments, has said that the planned re-introduction of capital gains tax could bring the two-year stock market bull run to a screeching halt.

PineBridge has picked out the impending tax as the single biggest threat to the share price rally at the Nairobi Securities Exchange (NSE) this year, predicting that it will trigger an investor flight from the bourse.

Treasury secretary Henry Rotich announced the re-introduction of the capital gains tax in his June 2013 budget speech, and has recently re-affirmed the government’s commitment to implement the new levy in a letter to the International Monetary Fund.

“Perhaps the greatest risk we see for the market at the moment is the potential introduction of capital gains tax that would be a major drawback for the market,” said PineBridge senior investments manager Nicholas Malaki at a briefing.

READ: Capital gains tax seen as threat to markets

PineBridge is Kenya’s biggest wealth management firm with more than Sh117 billion worth of retirement funds under its management as per the latest Retirement Benefits Authority figures released in June 2013.

Stockbrokers have also been opposed to the planned re-introduction of the tax, which was suspended in 1985, arguing it may result in fire sales, massive losses for savers and increased attractiveness of rival exchanges at the expense of the NSE.

“We compete with them (neighbouring countries) in almost all sectors of the economy. Investors will prefer these markets and shun our capital market. For example, a foreign investor with the appetite to invest in the energy sector in Africa would opt to buy shares in Umeme (Uganda) and not KenGen (Kenya) simply because of the burden of the capital gains tax,” said the Kenya Association of Stockbrokers and Investment Banks (Kasib) chief executive Willie Njoroge.

In his justification of the tax proposal, Mr Rotich said it would promote fairness by netting that extra share of revenue from wealthy investors.

“This (tax) will allow wealthier members of our society to also make a token contribution toward our national development agenda,” said the Treasury secretary in his June 13 Budget speech.

The Treasury has said that it will reintroduce the tax this year, but the Kenya Revenue Authority is yet to release a schedule showing applicable rates and timelines.

Shares had dropped to a 14-week low following Mr Rotich’s announcement in June last year as investors fretted the tax plans might sap the appeal of equities. The shilling also came under pressure, also reflecting concerns of possible damage to the economy.

READ: Nervous foreign investors cut NSE wealth by Sh100bn

Private equity fund Actis supported the capital gains tax terming it an alternative avenue for the Treasury to bridge the Sh330 billion deficit in this year’s national budget without further raising competition for commercial bank loans between the private sector and the government.

“This cuts two ways. Yes, the tax may be detrimental, but on the other hand if the government borrows a lot from the market it sucks liquidity out, and this raises interest rates,” said Actis managing director for East Africa Michael Turner in June.

The government is expecting to increase its revenue base which is under pressure from demand for increased wages, heavy infrastructure spending and the county governments.

Kasib, however, says that should the government go ahead and re-introduce the tax it may result in a lower tax yield.

“Empirical evidence from the US also shows that capital gains taxes have been associated with weak returns in the stock market. Weak returns, equals loss of investors which leads to lower trading volumes which ultimately means capital-gains events become few and far between. The end result is that government will not collect the cash it anticipates from capital markets,” said Mr Njoroge.

Driven by inflow of foreign investors the NSE-20 Share Index rose to 4,926.97 points last year up from 4,133.02 points in 2012, a 19.21 per cent increase.

Turnover increased by 79 per cent to Sh155 billion from Sh86 billion over the same period.