Kenya has experienced a significant boost in foreign portfolio investments over the past year, reflecting improved investor sentiment and growing confidence in the country’s economic prospects. According to the latest data from the Central Bank of Kenya (CBK), foreign investments in portfolio assets such as stocks, bonds, and other financial instruments have more than doubled in the 12 months to June 2024.

Surge in Portfolio Investment Liabilities

As of June 2024, Kenya’s portfolio investment liabilities amounted to KSh 6.4 billion ($49.5 million), a remarkable 121% increase compared to the negative KSh 32.6 billion ($233.4 million) recorded in June 2023. This recovery marks a significant turnaround for the country, which had been struggling with negative portfolio investments for over a year. The negative trend began in mid-2022, largely due to the U.S. Federal Reserve’s interest rate hikes, which strengthened the dollar and led to capital outflows from emerging markets like Kenya.

The surge in portfolio investments signals improving investor confidence in Kenya, particularly in the wake of a challenging economic environment marked by inflation, currency depreciation, and concerns about the government’s ability to service its debt. Experts attribute the rebound in investments to a combination of factors, including more favorable economic policies, the Central Bank’s actions, and improved global conditions.

Global and Domestic Factors Driving Foreign Investment

Economists believe the improvement in foreign investment inflows is partly due to changing perceptions about Kenya’s economic stability. Churchill Ogutu, an economist at IC Asset Managers, noted that foreign investors have resumed buying Kenyan equities, bonds, and other financial instruments, buoyed by signs of recovery in the local economy. “There’s been some rebound in foreign investor sentiment locally, with the taking up of equities, investments, and securities. This has now increased portfolio investments from a negative into a positive position,” Ogutu said.

A key factor contributing to this positive shift is the stabilization of the Kenyan shilling, which had been under pressure due to global and local economic challenges. The strengthening of the shilling, particularly in March 2024, was a turning point. At that time, the portfolio investment position shifted from a negative KSh 13.4 billion ($88.1 million) in February to a positive KSh 2.1 billion ($15.6 million). This coincided with a notable appreciation of the Kenyan shilling, making investments in Kenyan assets more attractive to foreign investors seeking to capitalize on currency gains.

Additionally, the Central Bank of Kenya’s decision to implement a significant interest rate hike in December 2023 helped restore investor confidence. The higher interest rates made Kenyan bonds and other fixed-income assets more appealing to international investors, who were seeking better returns in a global environment of rising interest rates.

Impact of Global Economic Trends

The resurgence in foreign portfolio investments in Kenya is part of a broader trend in emerging markets. After a period of outflows driven by global economic uncertainty, many investors are now returning to these markets, attracted by higher yields and improving economic fundamentals.

Kenya, in particular, has benefited from this trend. The country’s capital markets have shown increasing returns for investors over the past year, making it one of the most attractive destinations for foreign portfolio investments in Africa. The Nairobi Securities Exchange (NSE) has been a key beneficiary of this renewed investor interest. According to data from the NSE, the total market capitalization—the total value of all listed companies—rose by KSh 237 billion ($1.83 billion) between January and September 2024, reaching KSh 1.676 trillion ($12.9 billion).

This growth in market capitalization reflects rising asset values and improved performance of listed companies, driven by better economic conditions and more favorable investor sentiment. The NSE’s return rate for foreign investors has improved by 45% since January, making it the best-performing stock market in Africa, according to the Morgan Stanley Capital International (MSCI) Index, which tracks the performance of 10 major African stock markets.

Addressing the Risks and Challenges

Despite the positive momentum, Kenya’s financial market still faces challenges that could affect future foreign investment inflows. One of the key concerns is the potential for further currency volatility. Although the shilling has stabilized in recent months, it remains vulnerable to global economic shocks, particularly fluctuations in commodity prices and global interest rate trends.

Additionally, the risk of government default on its external debt remains a concern for some investors. Kenya’s public debt has risen significantly in recent years, and the country faces substantial debt servicing obligations. While the government has taken steps to manage its debt more effectively, including engaging with international financial institutions for debt restructuring, the high debt burden continues to pose risks to the country’s financial stability.

Analysts also point out that Kenya’s inflation rate, which has remained elevated, could dampen investor enthusiasm if it leads to further monetary tightening by the CBK. Higher interest rates, while beneficial for fixed-income investors, could slow down economic growth and reduce corporate profitability, which would negatively impact equity markets.

Policy Interventions and Reforms

To maintain the positive momentum in foreign portfolio investments, experts suggest that Kenya needs to continue implementing reforms that enhance the investment climate. This includes improving transparency in the capital markets, strengthening governance, and addressing structural issues in the economy.

The government has already made progress in some areas. For instance, reforms aimed at enhancing the ease of doing business have improved Kenya’s attractiveness to investors. Additionally, the Capital Markets Authority (CMA) has been working to improve access to financial instruments and encourage greater participation by foreign investors. The introduction of new products, such as derivatives and exchange-traded funds (ETFs), has also helped diversify investment opportunities in the country.

Furthermore, Kenya’s participation in regional economic blocs, such as the East African Community (EAC) and the African Continental Free Trade Area (AfCFTA), provides additional opportunities for investors. These initiatives are expected to boost trade and investment flows within the region, creating a larger and more integrated market that could attract even more foreign capital.

Conclusion: A Positive Outlook with Caution

The doubling of foreign inflows into Kenya’s portfolio investment market over the past year is a welcome development for the country’s economy. It reflects improving investor confidence and a more favorable economic outlook, driven by both domestic policy measures and global trends. However, Kenya must continue to address underlying risks, such as currency volatility, inflation, and debt management, to sustain this positive momentum.

As Kenya continues to implement reforms and improve the investment climate, it is likely to see further growth in foreign portfolio investments. With the Nairobi Securities Exchange performing well and foreign investor sentiment on the rise, the country’s capital markets are positioned for continued success. However, maintaining this trajectory will require careful management of both domestic and international risks to ensure that the gains made so far are not reversed.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

7th October, 2024