Kenya risks global financial shocks in new markets plan

Economic experts are faulting a proposal by the capital markets regulator to allow foreigners to own 100 per cent of shares in companies listed on the bourse.

Lifting the cap on listed firms, which is currently at 75 per cent, the experts note, will not only expose Kenya to global financial shocks but also lock out many locals from investing in the Nairobi Securities Exchange (NSE).

“After the 2007/2008 financial crisis, there was the recognition even by the International Monetary Fund (IMF) that some level of capital controls may be necessary in times of crises. Africa in general was not hit by the subprime crises as we were not very connected. But it seems that the lessons of the financial crises have not been learnt at all,” notes Dr Radha Upadhyaya, a development economist and research fellow at the University of Nairobi’s Institute for Development Studies. 

Dr Radha says making the stock market to attract huge capital inflows can be useful in good times but can quickly lead to liquidity crises during economic turmoil.

Imposition of a limit on foreign ownership, she said, was meant to encourage local ownership, given that the equities market provides a good alternative investment vehicle for middle class Kenyans.
10-year master plan

In its 10-year master plan, the Capital Markets Authority has proposed a review of the law on foreign ownership limits.

The regulator argues that the rule should be changed to “remove the blanket ownership ceiling which can unnecessarily inhibit foreign investment.”

The authority is to spearhead the law review, which it terms “important” and should be carried out in the medium term.

This is part of an attempt to make Kenya the market of choice for both local and global investors.

It is also expected to upgrade Kenya’s status from a frontier to an emerging market, allowing easy access to Kenyan markets by foreign investors.

“The reason for suggesting this change is that the 75 per cent ceiling has an impact on liquidity of certain stocks and this is likely to be exacerbated as foreigners continue to increase their investment in the Kenyan market,” said CMA.

During her recent tour of Kenya, IMF head Christine Lagarde noted that the momentum of growth in economies like Kenya’s was crucial to softening the impact of the 2008 global financial crisis.

She, however, noted that as financial health in developed countries normalise, the risk of heightened volatility may give rise to new challenges in emerging market economies.

Mr Gerald Cohen, a senior fellow in economic studies at the Brookings Institution US, in an article last month, noted that significant foreign investor inflows, while they are good for emerging markets, are likely to cause serious economic imbalances. “The risk is that the recipient countries don’t have economic structures and financial markets which are equipped to handle what can be massive flows relative to the size of these economies,” said Mr Cohen.