term inflow of foreign capital could have a destabilising effect on the shilling's exchange rate.

 

Experts say that while the local financial market is more sophisticated compared to most countries in sub-Saharan Africa, Kenya's securities market is too shallow and illiquid, compared to other emerging markets like South Africa where there is a strong network of market makers who help smoothen security trading.

 

The risks that a small economy, with a financial market that is still in the early stages of evolution is exposed to when it  suddenly attracts the kind of money Safaricom pulled is now becoming clear in Kenya in the second month of trading.

 

The need for the country to develop the capacity to handle big money without catching a cold is also becoming apparent as the country positions itself to become a major financial hub in Africa.

 

Analysis of the trading patterns and capital flows into the NSE since Safaricom listed shows that most of the money brought in by foreigners into the initial public offering (IPO) had a speculative motive as they have been selling and getting out every day.

 

Large chunks
The total foreign selling and buying have on average been at 51 per cent of the total turnover on the counter although the setting aside of large chunks of the Safaricom shares to international investors had been made on grounds that they would help stabilise the share price.

 

On the normal board (as opposed to trade on the much smaller prompt board), the total foreign selling and buying have on average been at 51 per cent of the Safaricom total turnover after the country attracted unprecedented international interest.

 

Foreign investors were allocated shares worth Sh11 billion, though the total bids for this stake amounted to Sh76 billion.

 

But during the past 27 days that Safaricom has been trading at the Nairobi Stock Exchange, foreigners have traded shares worth Sh7.36 billion out of the Sh14.54 billion.  During this period, the value of buy orders stood at Sh1.7 billion while the value of sales stood at Sh5.6 billion.

Morgan Stanley International, which acted as the joint transaction advisor to the Kenyan Government allocated itself over 800 million shares from the foreign investor's pool, which is 41 per cent of that stake.

 

From the beginning, a sizeable allocation for foreign institutional investors was preserved because they were expected to provide a stabilising force as the share started trading. But the reality emerging is that foreign investors, who generally hunt for outsized returns for the risks involved in investing in frontier markets like Kenya have mainly been interested in profit taking.

 

Huge demand for shares among local fund managers has, however, helped stabilise the price, despite massive foreign sales. If this trend continues, it may take time before the block of shares held by the likes of Morgan Stanley is contained.

Sell sell sell
Besides the attraction of Safaricom and the political turmoil that gripped the country at the beginning of the year, Kenya's should be a hot investment destination given that the NSE is up nine per cent - while most of the developed world indexes are down - and the local interest rates in the bond market are competitive starting at 8.75 per cent to 14.5 per cent.

 

Safaricom provided the natural entry, which has seen returns going as high as 45 per cent for foreigners who bought at Sh5.50 but have seen prices reach Sh8.

 

However, the little interest by funds that specialised in African markets (which has helped stabilise the market), trading in Safaricom shares has been mostly foreigners selling what they were allocated to take advantage of the arbitrage opportunities afforded by the rapid appreciation of the share price by over Sh2  since it was listed.

 

The impact of this heavy profit taking by foreign investors has been to depress the price and has had a depreciation of the shilling since June. If this trend continues, it could have a big impact on the economy, as a weakening shilling sparks inflationary fires and slows down growth.

 

On July 7, for example, nearly a month after the share premiered at the bourse, 59 per cent of the total market turnover was on the Safaricom counter alone. Kenya has seen its currency depreciate by a considerable margin of Sh4 or 6.5 per cent to hit a low of just over Sh66 in the past week from just about Sh62 just before the Safaricom share started trading at the Nairobi Stock Exchange.

Turnover
Foreigners have dominated the trading on the Safaricom counter, taking as much as 94 per cent of the total turnover on July 1. Since the share started trading, foreigners have taken an average of about 46 per cent on a daily basis in total turnover.

 

In 16 of the 21 days up to July 7 it has traded, the foreign sales have been more than three times higher than the buying by foreigners. The worth of the foreign sales stood at Sh2.7 billion compared to Sh856 million in the worth of shares that foreigners bought.

 

Foreigners in this case do not include the east Africans who are considered locals in terms of investments with the harmonization of investment rules in the region.

 

Although analysts say Kenya has not reached crisis proportions, a combination of a weak currency, rising global oil prices and rising costs of importing capital goods could spark an economic crisis.

 

Analysts add that whereas the foreign exit from the trading at the NSE has contributed, there is also the element of the current account deficit, which indicates the difference in the worth of imports the country is buying against that of exports.

 

This means that Kenya will be forced to depend more on the credit of its trading partners to pay for what its consumes, which could force interest rates to go up in order to stabilize the value of the shilling. This could also make the repayment of foreign debt more expensive.

 

With the significant foreign stake entering the stock market, analysts see that shocks to the economy could have more than a major impact on the currency and interest rates.

 

Such shocks could come from the side of inflation, which is being considered the number one risk on investments and the economy. On the political front, rising inflation is a major risk for the Coalition government.

 

Frustration is already evident in the fund management community, as many had hoped that the money was here to stay.

 

"We had expected that the foreigners investing in the Safaricom IPO were here to stay. But most of the foreigners are net sellers. We have seen more sales than buys in value terms in the market," said Mr Humphrey Gathungu, investment manager at fund management firm Stanbic Investment.

Despite the higher returns offered by other shares on the NSE, few foreign investors have shown interest.

Currency flight
Mr Gathungu attributes the weakening of the shilling to the flight of foreign currency but also points out that the current account deficit - which has been a near permanent feature of the economy - has been pressuring the unit towards the Sh65-to-the-dollar mark. This week, the shilling has been heading to the Sh70 mark against the dollar.

 

Kenya has been affected even more by the rising world oil prices because it is not an oil producer. The surging prices means that the country continue to spend even more on importing oil meaning it has to sell even more shillings to obtain the same amount of dollars to maintain the consumption of fuel in the country.

 

The situation is not helped by the fact there is pressure to import even more farm inputs to help in stabilizing prices and boost food security.
 
"Inflation remains a major, if not the biggest, risk right now," said Mr Githungu.

 

Analysis by Insurance Company of East Africa (ICEA) shows that the repatriation of Safaricom refunds by foreign investors had a major contribution to the weakening of the shilling.

 

"Going forward, the shilling may further depreciate owing to importation of food and the current low tourism season though donor inflows could give it some support," said the analysis done when the shilling was trading at about Sh64.40 to the dollar. The currency has since weakened to a low of about Sh66.

 

Mr Peter Wachira, the investment manager at AIG Global Investment, said that if the foreign capital outflows from the Safaricom counter were very persistent without safeguards, it could cause problems for the economy.

 

But he added that foreigners could also serve as support for the share when they sell and plough back or buy other shares.