IMF names Kenya among top 10 states exposed to the risks of portfolio flows

A Nairobi Securities Exchange staff monitors trading at the bourse in July. PHOTO | FILE
The electronic trading board at the Nairobi Securities Exchange. Foreigners have been net buyers of securities in the equities market. PHOTO | FILE 

Kenya is among the top 10 countries with large portfolio flows that expose them to changes in global investor risk appetites, says a new study by the International Monetary Fund.

The report on the state of the economy of various countries categorises Kenya with Ghana, Mongolia and Serbia as facing the risk of the portfolio flows reversing. Such flows relate to cash going principally into the equities and fixed-income or bond markets.

Various reforms

Among the risks are sudden depreciation of the local currency and the pass-through to import prices and overall inflation.

Sudden appreciation of a currency also encourages consumption of imported goods that become cheaper at the expense of domestic production and jobs.


“For the period 2012–14, 10 countries in the large-deficit group had average net portfolio inflows exceeding two per cent of GDP, for instance Ghana, Kenya, Mongolia, and Serbia,” says the report released this week.

The report emphasises that the ranking excludes financial centres, which by their nature have large portfolio flows as a percentage of their GDP. Such centres include the Seychelles, the Bahamas and Barbados.

Kenya expects to become a financial centre in the near future by implementing various reforms including allowing foreigners to own a listed company to the tune of a 100 per cent.

The IMF warns that the portfolio flows come at the cost of sudden outflows, such as is expected when interest rates in the US rise in coming weeks.

“A heavy reliance on portfolio flows to finance large current account deficits can imply a higher risk of capital flow reversals should global attitudes toward risk change,” says the IMF in the report.

Portfolio flows target to put money in companies listed on the Nairobi Securities Exchange or in fixed-income instruments such as Treasury bills and bonds. In the equities market, foreigners have recently been net buyers of the securities, seeking to benefit from their falling prices. But just a few months ago — when the shilling began to depreciate — the same foreigners were net sellers.

“For the ninth straight week, foreign investors were net buyers recording net inflows of $2.5 million, the second lowest within the period,” says Standard Investment Bank in an analysis for the week ending October 23.

In Kenya, interest rates have spiked in recent months making fixed-income instruments attractive to both local and foreign investors.

Analysts said that high subscription for the instruments is a result not only of local investors looking to lock in high rates but also foreigners entering the domestic debt market.

“The high subscription rates can be attributed to investors locking in attractive yields in short-term government instruments, and foreign investment flowing into the local debt markets as the returns are attractive, on a risk-adjusted basis,” said Cytonn Investment analysis.

A factor that is keeping portfolio flows going into emerging and frontier markets like Kenya is the delayed increase in US interest rates.

“The delayed rate hike by the Fed in the US, is pushing investors to seek attractive alternative investments in emerging markets,” said Cytonn Investments.