Domestic activities to cushion NSE against capital flight risk

The Capital Market Authority is banking on increased domestic activities on Nairobi Securities Exchange to cushion the bourse against capital flight uncertainties.

The second quarter market soundness report 2017 indicates that foreign investor holding at NSE shrunk to 20.8 per cent in 2017 compare to 21.1 per cent same period last year. It further shows that foreign investment now accounts for 57.9 per cent of total market turnover compared to 76.9 per cent in March 2017.

Experts believe that the current trends will minimize stock stability shocks in case foreign investors who dominate the market pull out due to political uncertainties. Today, Kenyans will be voting in hotly contested general elections amid fears of possible post polls chaos.

The 2007/08 post election violence in the country saw the NSE 20 share index drop by up to 40 per cent. The bearish market created a slump across the counters sending stock prices low, causing panicked hot money foreign investors to opt out.

NSE has mostly been dollar reliant, with foreign investors for instance controlling a record 87.18 per cent of market turn over in the third quarter of 2016.

CMA chief Paul Muthaura said that an analysis of the market participation in the past three quarters showed that local institutions have increased their holdings by 1.49 per cent, offsetting the international slow down which has in turn resulted in the witnessed market recovery trends.

”It therefore implies that the country is not significantly exposed to hot money which factor, may therefore be relatively less significant compared to other jurisdictions with a higher aggregate foreign shareholding in listed companies in the event of capital flight or political uncertainty,” Muthaura said.

He added that the on-going implementation of the capital markets master plan is aimed at fueling a robust domestic investor base to sustain the momentum in the stock market and help to mitigate against foreign capital flight eventualities.

Even so, Kenya recorded a low liquidity of 2.02 per cent in the second quarter compared to 2.07 per cent realized in the first quarter. The country’s liquidity was however the best in the region considering that Tanzania had 0.6 while Uganda registered a paltry 0.24 per cent.

Kenya’s turnover liquidity ratio is relatively low when compared with developing countries like Chile, Colombia and India whose liquidity stand at 11.2, 13.5 and 26.4 per cent respectively. China and Brazil have 273.2 and 79.5 per cent respectively.

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