All the signs indicate we are on course to recovery

• FORECAST: After a decade of booms and busts, which sank to its lowest last year, the Nairobi Stock Exchange is slowly lifting itself up and looking into the future. JIMNAH MBARU takes us through the past decade, and tells us what to expect ahead

BOND MARKET PERFORMANCE AND AUTOMATION

The Bond market has also grown in depth, activity and capacity with increased issues, longer maturity, more products, automation and the introduction of Infrastructure Bonds. The outstanding stock of Treasury Bonds rose from Sh80 billion in June 2001 to Sh390 billion by the end of 2009. Trading maturity for bonds extends to 20 years from 10 years in 2004, and the proportion of short-term to long-term debt reversed to 30:70 from 70:30.

Other reforms include the domestic Borrowing Cash Plan in favour of bonds, and the liberalisation of the pension sector to invest in fixed income securities on new monies as of Fiscal Year 2009/10.

Two Infrastructure Bonds of Sh18.5 billion each were successfully over-subscribed by 45 per cent and 200 per cent respectively. The government hopes to raise Sh109.5 billion from the debt market in its financial year 09/10, and has so far done 50 per cent of this figure.

Inflation levels have been declining since the beginning of 2009, and the Central Bank of Kenya is expected to keep interest rates as low as possible and control the cost of borrowing. The new computation method for inflation is also increasing pressure to bring down the rates.

The 2009 bond turnover rose to Sh122 billion, 130 per cent above 2008 on attractive yields and increased investors’ interest, resulting in a well-shaped yield curve. This has also served to create a lot of interest among potential corporate bond issuers.  The 1999 EADB corporate bond issue raised $17 million and, in 2001, the Safaricom bond raised $55 million. The pricing then was based on Treasury Bills as there was no yield curve.

Corporate Bonds rose from less than five in 2004 to 13 by the end of 2009, and were worth Sh44.5 billion, with 2009 having five issues worth Sh33.5 billion. An increasing number of companies are turning to the bond market to raise cheaper funds due to credit tightening and rising traditional capital costs.

Furthermore, the Bond market took a momentous step in December 2009 and automated the bond trading system, reducing the settlement period to T+3. This is expected to increase bonds’ liquidity and bring a lot more retail investors into the market. The system will also bring about a lot more transparency in the market and, in theory, encourage price discovery.

REGIONALISATION AND DEMUTUALISATION

During the period, various steps were undertaken towards regionalisation to enhance regional integration.  First, cross-listing was allowed and became operational with the signing of a memorandum of understanding between Kenya’s NSE, Uganda Securities Exchange (USE) and the Rwanda Stock Exchange (RSE).

A few cross-listed counters in the USE include Kenya Airways, Jubilee Insurance, East African Breweries, British American Tobacco, Equity Bank and Kenya Commercial Bank (also listed in RSE). Secondly, the NSE, the USE and Tanzania’s Dar Stock Exchange (DSE) set up a communication support system across the countries.

The decade also recorded increased trading and capital raising across the region, and the Stanbic Bank Uganda IPO in 2004 attracted over 56 per cent subscription from Kenya.

Thirdly, Kenya pioneered to include members of the East African Community (EAC) as citizens in IPOs, and the Safaricom IPO in 2008 was the first to sell across the region, with participation from both Uganda and Rwanda.

The NSE is also set to demutualise by listing itself as a corporate in the stock exchange. Demutualisation is the process whereby an exchange lists for trading of its shares in the stock exchange as a professionally-run corporate.

CONCLUSION

The last decade has seen many booms and busts for the stock exchange, but with commendable developments in products and infrastructure in both equities and bonds markets that has created depth and breadth in the capital markets. 

More developments are on course, and a lot is anticipated in terms of technological development as brokers embrace strong internal systems and Internet trading becomes viable.

Over-The-Counter (OTC) markets for small companies have been suggested and more products may be introduced in the future, including securitised instruments and Real Estate Investment Trusts (REITS) as has been indicated by the CMA reforms agenda.