Kenya is facing a foreign inflow crisis after the New York-based Morgan Stanley Capital International (MSCI) Inc. put the country on a watch list of troubled markets unfit for foreign investments.
Trade, Investment and Industry Cabinet Secretary Moses Kuria told The EastAfrican that the government would on Wednesday review measures meant to attract foreign direct investment (FDI) in the country.
“I said I will address this issue on Wednesday,” Mr Kuria told The EastAfrican Monday
Separately the CS said on Twitter that his is under strict instructions from President William Ruto to look at the issues surrounding the free flow of foreign portfolio investments into Kenya.
“I will outline the measures that the government of Kenya is taking in the next 48 hours,” he said on Monday.
This comes after MSCI, the American global, finance, research and investment advisory firm, indicated in its latest (2022) annual review of global investment markets that deteriorating macroeconomic conditions and unfavourable investment policies by the Kenyan government have rendered the country an unattractive destination for foreign investments.
Other countries on the watch list are Nigeria, Mauritius, Egypt, Sri Lanka, Brazil and Qatar.
The MSCI Index tracks the performance of global equities, bonds and real estate markets and advises foreign institutional investors, including pension funds, which markets to invest in.
It also classifies markets into developing, emerging, frontier and standalone.
In its latest market review report published in June this year, MSCI highlighted difficult investment conditions that have hampered foreign investments in Kenya.
These include biting dollar shortage that has made it difficult for foreigners to carry out their trading operations in the country, a situation that has been compounded by a depreciating local currency, leading to a rise in foreign currency deposits and further squeezing dollar supply.
Capital repatriation restrictions
According to the report, MSCI also raised concerns regarding how the Kenyan government has imposed foreign capital repatriation restrictions by demanding a certificate of foreign currency inflow before allowing foreign investors to send home their investment earnings.
“A certificate of foreign currency inflow is required for any capital repatriation. There is no offshore currency market. In addition, liquidity on the onshore currency market has been relatively low in the recent past,” says the report.
According to the report, the process of investor registration and account setup in Kenya is tedious and can take up to one week.
In addition, there is no central registry, with some registrations done by financial institutions.
“In-kind transfers and off-exchange transactions are prohibited,” says the report.
Other unfavourable policies include difficulties in accessing short-term overdrafts of less than one year from local financial institutions, which have made clearing and settlement of transactions an uphill task, and a high cost of trading due to limited level of competition among brokers in the market.
The latest development puts Kenya’s hopes of attaining an MSCI emerging market status by 2023 and transforming into a regional investment and financial hub in tatters.
Kenya’s President William Ruto has also revived a proposal to impose higher taxes on Kenya’s super-rich and high-income earners, endorsing the introduction of a wealth tax that failed to sail through Parliament over the past four years.
It is feared that the move could lead to capital flight.
Foreign investors fleeing
In Kenya, foreign investors who are fleeing the country to developed markets such as the US due to a rise in interest rates account for over 60 per cent of the daily traded turnover at the Nairobi Securities Exchange (NSE).
NSE data shows that foreign sales increased significantly during the first six months (January-June) of this year (2022), pushing the benchmark NSE-20 Share Index below the 1,700 mark for the first time in 20 years, signalling muted activity and freefall of stock prices on the 68-year-old stock market
Kenya is currently classified as a frontier market and risks being downgraded to standalone market, the lowest classification characterised by hostile investment climate and polices that makes accessibility of the market impossible.
For instance, Russian equity market was downgraded from emerging market to standalone in March this year due to deterioration in the accessibility of the Moscow Stock Exchange as a result of sanctions from several jurisdictions, restrictions on foreign investors’ ability to transact in securities and deterioration in the convertibility of the Russian Ruble into foreign currencies.
Among other frontier markets facing challenges include Nigeria which has been adversely impacted by low foreign exchange, compromising the ability of foreign investors to repatriate funds from investments in the local equity market, and Sri Lanka, which is also facing forex liquidity challenges amidst the ongoing economic crisis in the country.