Struggling stock exchange sign of ailing economy
The stock exchange serves as a barometer of the country’s fiscal health, and the pulse of the economy’s ups, downs and trends.
It serves as the benchmark of Kenya’s financial underpinning and a signal to the state of the economy.
Therefore, to establish that close to 30 per cent of companies listed on the Nairobi Securities Exchange (NSE) face financial constraints means our financial architecture has bent, and needs to be pivoted with caution.
The firms may face difficulties in sustaining operations and dividend payments.
This unveils the close connection between the financial constraints faced by companies and how this interconnects with activities of the State in the local market and the rising interest rates.
The burden on these firms which can not meet their short-term obligations also speaks to what other companies are going through depicting the bigger picture for most companies.
Most of the troubled firms are from productive sectors such as automobiles and accessories, investment services and manufacturing, commercial and services, construction, energy, and petroleum.
Unfortunately, the unrelenting civil strife has hit economic activities and seems to have further dampened investors’ appetite for stocks and business in general.
Which brings to the concern the private sector’s economic infrastructure and health seems to be closely revolving around that of the government. Every time things go south, institutional investors at the bourse exit the market, eroding billions in paper money from the local stock.
This is partly due to the fact that the bourse is currently majority owned by foreign investors at 50.01 per cent, with stockbrokers owning a paltry 17 per cent stake, which may explain why it suffers whenever there is a little spec of trouble.
Recent Central Bank of Kenya data shows that year-on-year net financial account inflows dropped by 34 per cent ($345 million) to $660 million in the first quarter of 2023, compared with net inflows of $1 billion in the same period in 2022.
For a government that is in the market for a combination of a dip in inflows, negative working capital, the environment is not conducive for firms to grow as fast to support the economy.
The reason being the government is running a budget deficit of its national accounting, therefore it must borrow either from the domestic or external financial markets to bridge the deficits.
Unfortunately, government borrowing is creating other macroeconomic problems in the economy, and the World Bank has already cautioned over crowding out of the private sector from the local debt market due to heavy borrowing.
The taxman is faced with a challenging economic environment witnessed in the last financial year (2022/23) where the Kenya Revenue Authority noted that taxpayers exhibited resilience paying their taxes to support growth.
For the period July 2022 to June 2023, the authority managed a revenue collection of Sh2.17 trillion compared to Sh2.031 trillion in the last financial year, which was higher than what was collected in the financial year 2021/22 by Sh135 billion. However, it doesn’t reach the ambitions of the government which was eyeing close to Sh3 trillion.
The truth as served by the Bretton Woods institution is that, as the Treasury continues to compete with households and traders for credit, commercial banks will not reach their optimal to support investments, which is worrying to distressed firms. This eventually catches up with the government in terms of dwindling tax collection.
Besides competition for credit with the State, private sector credit is also facing other risks going into the second half of the year, including rising interest rates and deteriorating asset quality in banks from higher loan defaults.
For example, rising interest rates for commercial bank loans which are based on a higher Central Bank benchmark lending rate which rose to 10.5 per cent at the end of June when the new governor Kamau Thugge took office, from 9.5 per cent previously.
Further, the implementation of risk-based credit pricing by banks is expected to result in costlier loans for borrowers with a higher risk profile.