The Nairobi Securities Exchange (NSE) has shed Sh63.1 billion in investor wealth over the past two weeks, signalling investors’ concern over the impact of anti-government protests on the economy.
The shilling has also seen slight volatility over the past week on uncertainty over the government’s spending plans following the withdrawal of the Finance Bill 2024, and the prospects of higher borrowing which is likely to keep interest rates elevated in the near term.
President William Ruto has failed to appease a spontaneous youth protest movement despite having abandoned plans for tax hikes that triggered the unrest two weeks ago.
NSE data shows that market capitalisation—the measure of investor wealth— fell to Sh1.706 trillion at close of trading yesterday, from Sh1.769 billion on June 18, the first day of the tax protests.
In the period, the NSE 20 Share Index has declined by 4.8 percent to 1649.15 points, and the NSE All Share index is down by 3.5 percent to 109.25 points.
The bourse’s major stocks, including Safaricom (-4.9 percent), Equity Group (-4.6 percent), EABL (-0.9 percent) and KCB Group (-8.8 percent), have all shed value over the past fortnight.
These stocks are highly exposed to institutional and foreign investors who dominate trading at the NSE, meaning their share price movements tend to closely reflect the prevailing sentiments at the market.
“The market is correlated with the political temperature in the country as we have seen before, for instance, in March last year when protests caused a slowdown in trading and prices. We are starting to see a similar trend now as the protests continue,” said Ronnie Chokaa, an analyst at AIB AXYS Africa, a city-based investment bank.
“On the foreign desk, which has had net inflows over the past three months, there is a slowdown in market participation, going down to a low of 12.5 percent on Monday.”
The souring sentiments in the past two weeks have come in the middle of an otherwise positive period for a bourse that has made double-digit gains in the year-to-date.
Since the turn of the year, market capitalisation has gone up by Sh268 billion or 18.7 percent, while foreign investors turned net buyers in the first half of the year with net inflows of Sh749 million, compared with net outflows of Sh15.41 billion in the first half of 2023.
President Ruto has since dropped the proposed tax increases - but the demonstrations have morphed into a nationwide movement against corruption, police brutality and misgovernance.
The scale of demonstrations were yesterday smaller than last week’s, but chaotic scenes were witnessed in the cities like Nairobi, Nakuru and Mombasa.
Dr Ruto has directed the Treasury to come up with ways to cut spending to fill a budget gap left by the withdrawal of the tax plans, and also said more borrowing would be required.
Many businesses remained closed in the Nairobi city centre yesterday, while flow of transport to western Kenya was disrupted after protesters barricaded the Nairobi-Nakuru highway at Kangemi.
The markets are also reacted to uncertainty over the government’s fiscal plans going forward, especially over the size of the budget deficit.
When signing the Appropriations Bill, the President instructed the Treasury to prepare a supplementary budget to cut expenditure by Sh346 billion, to cover for the expected loss of revenue following his withdrawal of the Finance Bill.
Ideally, this would help the government keep its earlier projected budget deficit of Sh597 billion—to be filled by borrowing— unchanged. In a live TV interview on Sunday, Dr Ruto said that the government will borrow Sh1 trillion in the current fiscal year, raising questions over the size of the expected budget cut, if any.
“For the shilling, uncertainty around the government’s funding gap now that the Finance Bill has been withdrawn is a concern. There’s also a question of whether the country will access the remainder of IMF funding, which is conditional on meeting the revenue measures that were being driven by the Bill,” said Wesley Manambo, an analyst at Standard Investment Bank.
“The shilling might see volatility until we get clarity on the borrowing plan.”
The official exchange rate of the Central Bank of Kenya (CBK) shows that last week the shilling was on the back foot against the dollar, depreciating by 0.7 percent to exchange at Sh129.52 to the US currency on Friday from Sh128.55 at the start of the week.
It regained some ground on the dollar on Monday, appreciating to Sh128.89, before gaining further to trade at Sh128.57 yesterday afternoon.
Higher state borrowing is likely to keep interest rates on government securities high in the near term, which also means that the cost of private sector credit will remain elevated given that the government’s risk-free cost of borrowing is seen as a floor for interest rates in the economy.
