Business Daily (Nairobi)
James Makau
2 January 2008
The equity market on the Nairobi Stock Exchange lost Sh40 billion in value, equivalent to five per cent of the market capitalisation on the first day of trading this year.
Small investors sold their shares in panic over the ethnic violence and the political uncertainty that has gripped the country.
The NSE 20 share index, an important barometer that measures the movement in the prices of the biggest blue chips firms listed in Kenya and which is used by analysts as a proxy for where the performance of the economy is headed lost 277.65 points to close at 5,167. The market value of all the listed shares fell from Sh851 billion to Sh811 billion.
This was a significant decline that underscores how jittery investors and the business community has become since the presidential elections was announced suggesting that the economy could slow somewhat in the first quarter of 2008.
This gloomy view was reflected in the currency markets, where the shilling traded thinly and lost marginally against the dollar as investors took a wait- and- see attitude.
Most dealers were absent from the market as trading in Kenya's foreign exchange market scheduled to start at 9.00am was delayed by two hours.
If the current political and security crisis is not resolved, analysts expect the situation to worsen.
"In the near term, if the unrest does not subside, the Kenya Shilling is likely to come under pressure," says Razia Khan, Standard Chartered's chief economist for Africa.
According to Ms Khan, given the controversy that accompanied the announcement of results by the Electoral Commission of Kenya, and the outbreak of unrest, a relief rally by markets was unlikely.
Following a tense vote count, President Kibaki has been declared the winner of the Kenyan election, beating his opponent Raila Odinga by a narrow margin.
In yesterday's trading, the market opened at Sh64 against Sh66, and as expected the shilling depreciated sharply, with dealers pointing out that the two shilling spread was evidence of an illiquid and jittery market.
"Everyone expected a knee jerk reaction hence the thin trades and lack of full market participation," said Andrea Balongo, a senior dealer at Middle East Bank.
"I think a move to the Sh70 level cannot be ruled out...." reckons Chris Muiga, a forex dealer at Kenya Commercial Bank.
Mr Muiga said major demand for foreign currency comes from oil importers and that if the price of oil at the pump should rise, the effect is expected to cascade to all sectors of the economy.
"In the short term, inflation will rise and pressure personal incomes," says Mr Muiga.
By early morning trading at the NSE, the share prices of a number of counters had nudged downwards as the market remained subdued amid quiet trading. Some brokerage firms remained closed, with dealers reporting that a number of investors, most of them retail, had taken selling positions in the wake of the ensuing unrest.
"Trading has been pretty slow and most market players are watching the political situation before making any decisions," says Johnstone Mwombe of Sterling Securities Ltd.
The stock market had already taken a beating in 2007 which was a bear market that witnessed a waning stock market index despite new listings and strong company valuations.
The valuation fundamentals of many companies are still very strong, due to the booming economy and on some shares this is not reflected in their performance. But the big question is how the economy will shape up and how this will be reflected in stock prices following the chaos that has ensued in the wake of the general election.
According to Ms Khan however, the deeper implications for the economy should also be considered.
Many Government ministers lost their seats in the recent election. Although the economy has done well, the electorate has still indicated its preference for change, and perhaps an impatience that more should be done to tackle graft. President Kibaki will inherit a parliament that has a significant opposition presence.
Moreover, with the vote this close, there will be greater pressure on the government to deliver on its election promises.
"Kenya's democracy has come a long way, and change with each election is now a reality. In terms of economic policy, this will create more pressure to deliver meaningful change, as quickly as possible," says Ms Khan.
Expect the rebuilding of infrastructure to continue, which, in terms of financing, will require that privatisation plans go ahead.
Already faced with a sizeable fiscal deficit, there is limited scope for additional recurrent expenditure in the near term, and the authorities will not want to adopt policies that result in significant upward pressure on interest rates, possibly endangering the economic upturn. However, new sources of financing are available to Kenya.
But with its planned eurobond, Kenya will need to act to restore the confidence of international investors - and settling domestic political disputes will be key to this.
"Its difficult to call what will happen long term, it all depends on what solution politicians arrive at, if its amicable to all then the shilling should recoup its losses....investor confidence is however very low and drastic measures need to be taken to shore it up," says Mr Muiga.
While the value of exports to the African region has continued to decline in the last two years, the region continues to be the major destination of Kenyan exports. Uganda, Tanzania, Egypt, Rwanda and South Africa are Kenya's single largest export destinations with the entire Africa region accounting for 43 per cent of Kenya's total exports.
The current unrest in Kenya is already taking its toll on other countries in the region, with acute fuel and commodity shortages being reported in Uganda.
At one extreme, exchange rate changes had no effect on re-exports while st the other extreme, service exports, being relatively less intensive in imported inputs, were mostly affected by currency changes.
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