Free capital flow places Kenya ahead of South Africa

What you need to know:

Country climbs from sixth position last year
This is based on the second edition of ‘Absa Africa Financial Markets Index’
The report ranks markets based on six pillars: market depth, access to foreign exchange, market transparency, tax and regulatory environment.
Other measures are macroeconomic opportunity and the legality and enforceability of standard financial markets master agreements.

Kenya has overtaken South Africa to rank as the top African financial market in attractiveness to foreign investors thanks to relaxed foreign exchange capital regime.

This is based on the second edition of ‘Absa Africa Financial Markets Index’ prepared by Absa Group and Official Monetary and Financial Institutions Forum (OMFIF).

The report ranks markets based on six pillars: market depth, access to foreign exchange, market transparency, tax and regulatory environment, macroeconomic opportunity and the legality and enforceability of standard financial markets master agreements.

Kenya scored 93 out of 100 points in the access to foreign exchange metric, improving from last year’s sixth position and overtook South Africa which scored 91.

“Kenya earns the highest marks in this pillar, a significant improvement from ranking sixth last year. The relaxation of capital controls boosted its performance, as did improvement of the country’s net portfolio flows to reserves ratio,” says the Absa report.

However, when all the six metrics are considered, Kenya moved from fifth to third with a score of 65 after South Africa (93) and Botswana (65 points).

Forex liquidity

The report notes that investors who were surveyed consider the exchange rate regime and degree of openness to the flow of capital as crucial in shaping the foreign investment environment.

The top score in access to foreign exchange means that Kenya’s level of capital controls and exchange rate reporting standards rank high on the continent and investors have an easier time accessing them.

In addition, with about $34 billion (Sh3.4 trillion) foreign exchange liquidity, the report ranks Kenya as second to South Africa on markets where foreign investors’ ability to deploy and repatriate capital is high.

Even though the index rewards countries with a high level of foreign exchange liquidity, it cautions that the risk of capital outflows in highly open capital markets.

“While this can be an important element of well-functioning and resilient markets, it is also important that central banks observe prudent reserve management strategies and can cope with sudden capital outflows,” says the report.