Kenya bourse investors spooked by Q2 performance

By Steve UMIDHA

Kenya’s stocks market suffered a 20.05 percent in three months to June 2022 after a rout triggered by the Central Bank’s attempt to curb persistent inflation and exacerbated by gathering concerns over economic growth.

Latest data by the Capital Markets Authority (CMA) for the quarter ended June, shows that market capitalization performance decreased to Sh1.9 Trillion during the period, down from Sh2.4 Trillion recorded three months prior.

The fall left the blue-chip index down in as many months owing to Russia’s shocking invasion of Ukraine as well as rising inflationary pressures.

Russia’s invasion of Ukraine in late February caused a global shock – leaving behind grave human implications which were fed through into markets, with equities declining and bond yields rising – meaning prices fell.

Commodity prices soared given Russia is a key producer of several important commodities including oil, gas, and wheat. This contributed to a further surge in inflation as well as supply chain disruption.

Closer home – the Nairobi Securities Exchange (NSE) 20 Share and the NSE All Share Indices decreased by 12.66 percent and 20.08 percent respectively in the quarter under review recording 1.612.89 points and 124.47 points respectively in June.

Bond market turnover rose by 2.47 percent with Sh195.67 Billion worth of bonds being traded compared to Sh190.95 Billion traded in the first three months of the year.

IMF’s global growth review…what it means for you and me?

Kenya is staring at a possible severe and exogenous economic shock beyond 2022, with the latest global financial metrics by the IMF guaranteed to expose the local market.

The International Monetary Fund (IMF) – a lending arm of the World Bank on Tuesday slashed the global growth forecast for 2022 to 3.2 percent, down by 0.4 percentage point from the April projection.

In its latest global growth review, the lender cited Russia’s invasion of Ukraine as the lingering concern whose impact has provoked a surge in food and fuel prices since the war broke out in February.

Those concerns now threaten the country’s fiscal outlook, with the latest revision coming at a time several shocks have hit the world economy now weakened by Covid-19 pandemic – including higher than expected inflation globally, triggering tighter financial conditions from the ongoing war’s spillovers.

“The global economy is facing an increasingly gloomy and uncertain outlook,” IMF chief economist Pierre-Olivier Gourinchas told a virtual press conference, adding that many of the downside risks flagged in the IMF’s April World Economic Outlook (WEO) have begun to materialize.

Further pointing that inflation has also broadened in many economies including the sub-Saharan market which hosts the Kenyan economy, reflecting the impact of cost pressures from disrupted supply chains and historically tight labor markets.

Kenya’s inflation averaged 6.3 percent in June from 6.2 percent a month before, according to Focus Economics, whose panelists expect inflation to average 7.0 percent in 2022, which is up 0.2 percentage points from last month’s forecast. It seems that figure will average 6.2 next year.

In an inflationary environment, like what is presently grasped in the country, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Ordinarily the economy suffers if inflation becomes too high, but with controlled, lower inflation, employment increases and consumers have more money to buy goods and services, and the economy benefits and grows.

The Central Bank of Kenya (CBK) is expected to increase its base lending rate by a further 0.5 per cent to cushion the economy from roaring inflation, according to economists at ICEA Asset Management which made the predictions ahead of the regulator’s Monetary Policy Meeting (MPC).

The move signals an even higher interest rate regime, barely three months after a similar review by the CBK monetary committee was done in May.

“In line with the trend internationally, the MPC is expected to further raise the Central Bank Rate by 0.5-1 per cent during its meeting later in July,” offered ICEA’s George Kamau, a Senior Portfolio Manager at the firm in an interview with Business Hub on Monday.

Such controls often include an upward review of a country’s base lending rate to cushion the country from economic corrosion even though such a move impacts traders.

The CBK – who is the country’s banking regulator, sets a base rate or base interest rate which it then charges to commercial banks for loans.

While commercial banks are free to set their own interest rates for borrowing, the rates they charge on loans and offer on savings tend to be derived from the base rate.

Today, Kenyans are caught in the grip of higher food prices brought about by a combination of adverse weather, rising input costs – which have been worsened by the Ukraine war – as well as policy adjustments the government agreed to access funding from the International Monetary Fund.

Next month’s national polls are also seen as a potential threat to the country’s own economic growth projections. The real gross domestic product (GDP) is projected to grow by 5.5 percent in 2022 and 5.2 percent on average in 2023–24.