Kenya’s struggling stock market is seen as a reflection of the country’s overall economic challenges. With nearly 30% of listed companies on the Nairobi Stock Exchange (NSE) facing financial constraints, it is clear that the financial architecture of the country needs to be carefully reexamined. These challenges have had a significant impact on businesses, making it difficult for them to maintain operations and pay dividends.
The financial constraints faced by businesses are closely linked to the state of the economy and rising interest rates. Many companies, particularly those in the productive sectors such as automobiles and accessories, investment services, manufacturing, trade and services, construction, and energy and oil, are grappling with these challenges.
Unfortunately, the ongoing civil unrest has further dampened investors’ appetite for stocks and business in general. Whenever something goes wrong, institutional investors quickly exit the market, eroding billions of paper money from the local stock.
One factor that concerns the private sector is the close alignment between the economic and health infrastructure of the government. When the government faces difficulties, it has a direct impact on institutional investors and the stock market as a whole. Currently, the majority ownership of the stock exchange lies with foreign investors, leaving local stockbrokers with a minimal stake. This may explain why the stock market suffers whenever there is a glitch.
Recent data from the Central Bank of Kenya reveals a decline in net inflows in the first quarter of 2023, further exacerbating the challenging economic environment. As the government runs a budget deficit, it needs to borrow from domestic or external financial markets to cover the shortfalls. However, heavy borrowing by the government has led to concerns about crowding out the private sector from the local debt market, as warned by the World Bank.
In terms of revenue collection, the Kenya Revenue Authority has managed to sustain growth despite the challenging economic conditions. However, the revenue falls short of the government’s ambitious target of nearly 3 trillion shillings. The competition for credit between the government and households/traders, along with rising interest rates and increased defaults, poses additional risks for the private sector in the coming months.
With the rise in interest rates and risk-based credit pricing, commercial bank loans have become more expensive for borrowers with a higher risk profile. This further hampers businesses struggling to secure the necessary credit for investment and growth.
Overall, Kenya’s struggling economy is reflected in its stock market, and several factors contribute to the current challenges. The dependence on foreign investors and the government’s budget deficit have created an environment that is less conducive to business growth. The private sector is feeling the pressure, and the government’s efforts to compete for credit impact tax collections as well.
As the country navigates these economic hurdles, a balanced and comprehensive approach is needed to address the issues facing businesses, investors, and the economy as a whole. It is crucial to prioritize fiscal reforms, attract more domestic investment, and create an environment that fosters business-friendly policies. Only through these concerted efforts can Kenya regain its economic strength and stability in the long run.
