17th Africa Oil Week 1- 5 November 2010 Cape Town , South Africa
N.S.E Share Price
...NSE SHARE Index: 4591.04  UP by 96.25 points | Kakuzi Ord.5.00  81.50  -0.50 | Rea Vipingo Plantations Ltd Ord 5.00 18.60  1.35 | Sasini Ltd Ord 1.00 14.20  -0.05 | AccessKenya Group Ltd Ord. 1.00 20.50  0.00 | Car & General (K) Ltd Ord 5.00 48.50 DNT | CMC Holdings Ltd Ord 0.50 12.60  0.00 | Hutchings Biemer Ltd Ord 5.00 20.25 DNT | Kenya Airways Ltd Ord 5.00 52.00  1.50 | Marshalls (E.A.) Ltd Ord 5.00 16.40  0.40 | Nation Media Group Ord. 2.50 143.00  1.00 | Safaricom Ltd Ord 0.05 6.00  0.05 | Scangroup Ltd Ord 1.00 39.50  1.75 | Standard Group Ltd Ord 5.00 39.00  1.00 | TPS Eastern Africa (Serena) Ltd Ord 1.00  58.50  2.00 | Uchumi Supermarket Ltd Ord 5.00 14.50 DNT | Barclays Bank Ltd Ord 2.00 68.50  0.00 | Centum Investment Co Ltd Ord 0.50  23.50  1.25 | CFC Stanbic Holdings Ltd ord.5.00 85.50  0.50 | Diamond Trust Bank Kenya Ltd Ord 4.00 96.50  1.00 | Equity Bank Ltd Ord 0.50 24.00  0.00 | Housing Finance Co Ltd Ord 5.00 24.75  0.25 | Jubilee Holdings Ltd Ord 5.00 176.00  2.00 | Kenya Commercial Bank Ltd Ord 1.00 19.00  0.00 | Kenya Re-Insurance Corporation Ltd Ord 2.50 12.80  0.10 | National Bank of Kenya Ltd Ord 5.00 43.75  3.25 | NIC Bank Ltd 0rd 5.00 42.25  2.00 | Olympia Capital Holdings ltd Ord 5.00 7.00  -0.10 | Pan Africa Insurance Holdings Ltd 0rd 5.00 69.50  1.50 | Standard Chartered Bank Ltd Ord 5.00 281.00  19.00 | The Co-operative Bank of Kenya Ltd Ord 1.00 16.15  0.85 | Athi River Mining Ord 5.00 159.00  7.00 | B.O.C Kenya Ltd Ord 5.00 140.00  2.00 | Bamburi Cement Ltd Ord 5.00 203.00  3.00 | British American Tobacco Kenya Ltd Ord 10.00  250.00  2.00 | Carbacid Investments Ltd Ord 5.00 159.00  -1.00 | Crown Berger Ltd 0rd 5.00 35.50  0.25 | E.A.Cables Ltd Ord 0.50 18.95  -0.05 | E.A.Portland Cement Ltd Ord 5.00 115.00  1.00 | East African Breweries Ltd Ord 2.00 184.00  2.00 | Eveready East Africa Ltd Ord.1.00 4.35  0.25 | KenGen Ltd Ord. 2.50 18.10  0.20 | KenolKobil Ltd Ord 0.05  10.30  0.05 | Kenya Power & Lighting Co Ltd Ord 20.00 205.00  5.00 | Mumias Sugar Co. Ltd Ord 2.00 14.80  0.80 | Sameer Africa Ltd Ord 5.00 9.05  -0.25 | Total Kenya Ltd Ord 5.00 30.75  0.25 | Unga Group Ltd Ord 5.00 12.80  0.15 | A.Baumann & Co Ltd Ord 5.00 11.10 DNT | City Trust Ltd Ord 5.00 112.00 DNT | Eaagads Ltd Ord 1.25 48.00 DNT | Express Ltd Ord 5.00 9.70  0.15 | Williamson Tea Kenya Ltd Ord 5.00  199.00  0.00 | Kapchorua Tea Co. Ltd Ord Ord 5.00 149.00  9.00 | Kenya Orchards Ltd Ord 5.00 3.00 DNT | Limuru Tea Co. Ltd Ord 20.00 290.00  0.00 
Subscribe to Ratio Magazine
Check out our Business Diary
Find a job

 

Kenya: Global Credit Crisis Going Local Print E-mail
Wednesday, 11 February 2009
Popular opinion took the bankruptcy of GTV as the moment when the global financial crisis finally hit Kenya. In reality, however, the economy has already felt the credit crunch and its fallout as early as March 2008 – even if the government may have been reluctant to admit this.

There are complex reasons behind the dramatic losses sweeping global markets. The first wave was the realisation that banks were carrying grossly overvalued assets on their books; followed by the second wave once it became clear that the constant revaluations were making it impossible to determine who was holding which worthy asset, leading to a lending freeze at institutional level. Finally, that freeze at macro level led to sharply reduced financing options at micro level, creating the current recessionary environment. The speed with which all this happened and the sheer scale of the numbers were mind numbing. There is a logical chain of issues relating to the current predicament: A defective regulatory environment led to appalling decisions on risk management which meant that, as markets turned and asset values fell, there was no way to write off nominal losses against capital. Hence paper losses forced cash calls, draining liquidity from non-financial assets, ultimately reducing prices for all.
admin

Net Creditor
So why should cash flowing out of sovereign funds, hedge funds, private equity funds, derivatives markets and such high-flying places affect the local corner shop in Nairobi? There are a number of linkages.

Firstly, Kenya is a net creditor. This begins with a heavily indebted government and runs all the way through to the wholesaler who sells to that corner shop. As a consequence, Kenya’s highest exposure to the global market is not, in fact, the price of oil   particularly when it’s siphoned out the back door at KPC   but the cost of money. The government budget, the banking system, the stock market, the currency value, the cost of every capital-intensive input to the economy and the trade-financing system are all entirely dependent on money being cheap, plentiful and stable. A failure to realise this could become very costly.

The government has shown that it is slow in grasping its problems, not just when the Central Bank of Kenya (CBK) governor kept predicting 6%+ GPD growth well into 2008. For starters, there had been no sign of any major budgetary scaling back. If anything, the then acting Finance Minister misguidedly argued that since governments were borrowing at 0%, treasury would proceed at full steam with its USD500m bond issue - a highly unrealistic expectation that thankfully died a quick death.

Looking forward, the massive flood of debt issuance by Western governments to prop up their economies through stimuli packages is going to suck a lot of money away from the already shrinking pool of global investment. In short, unless Kenya pays a greatly enhanced interest rate of about 12% to 18% for a 10-year USD bond, there is no borrowing to be had. And even if Kenya were foolish enough to raise this money, the probable rise in inflation over the next five years in the West will at some stage lead to a sharp rise in interest rates. If the repayment of principal does not blow the budget, the interest certainly will. Minister Kenyatta or Governor Ndungu will need to resist the silver tongued approach of investment banks desperate to get their fee on the bond issuance.

Kenya’s capital markets and currency have already taken a battering from the rush out of money from assets denominated in anything other than US dollars. The NSE was overvalued even before there were shilling income streams that were being converted at artificially low exchange rates. The triple whammy of a falling shilling (lowering the value of our companies’ income cash flows), poor earnings prospects and the outflow of cheap money have hurt investor confidence.

Exposure to Carry Trade

A country like Kenya with few capital controls on foreign money will always be exposed to the carry trade. 36 months ago, dollars could have been borrowed at 5% and invested in the NSE, the property market, or bank deposits earning 15% to 25% in one year. A flood of this sort of investment was enthusiastically described as remittances coming home to generate wealth. But it wasn’t – that much is now obvious. All it did was massively raise values to an unsustainable point and lead increasing numbers of the gullible to pile into the market just as the world turned on its axis and a tremendous amount of value was destroyed. The investors who got wiped out by dreams of untold wealth through the Safaricom IPO rainbow are only one example. It was why the Co-op IPO Kenya: Does the Co-op Bank IPO Still Make Sense? left much to be desired if market enthusiasm is any indication. No one did anything criminal, but it was certainly misguided.

Trade finance is another sturdy underpinning of Kenya’s economy. The country is a major transit point for goods into and out of East Africa. Kenya’s banks, still unrated for what it is worth, earn substantial funds doing the grunt work of financing and paying for imports and exports. A rise in credit risk of the sovereign   already in poor financial shape given the large debts and perennial budget deficits   and of the banks is going to make the import of goods more expensive. As a consequence, Kenya will see almost no benefit from the sharp decline in oil prices. Since Kenya imports bulk chemicals and capital equipment, the cost of food will be driven up as will that of finished goods. Thus Kenya will also not see any benefit from the shilling’s depreciation that should make exports cheaper in dollar terms – Kenyan firms will have to add on extra costs to sell them.
 
Banking Sector Weakness
 
The final weakness lies in Kenya’s banking system. The risk inherent in industry’s regulatory framework is that it appears to be in several minds whether to force consolidation and build stronger banks, to allow foreign ownership of small banks, or force all the banks to become retail banks even outside their particular niches. As became clear everywhere else in the world over the last 18 months, a reduction in liquidity can bring even the largest global banks to their knees. This wave has so far not hit Kenya’s banks, not the least because local banks could not purchase a lot of the mispriced assets that were on sale and have caused such major problems when written off. The other is that due to arcane regulations, Kenya’s banks had no derivative exposure that can lead to counterparty risk. The complacent view was that this eliminates direct exposure to the credit crunch.

But this is a short-sighted assumption. The flood of cheap credit meant that a lot of it found its way to our shores – and its sudden withdrawal put pressure on local share prices, leading to faster redemptions and liquidity calls, forcing brokers that had parked their clients’ money in illiquid positions to come off the rails. Banks are only one step removed from the broker failures that happened in 2008. For the last four years, bank assets in Kenya have grown at a stunning rate, beyond the rate of growth of the economy. This is partly explained by a wholly correct loosening of credit taps into an economy that post-1993 had been starved of an efficient allocation mechanism for debt. But this credit was fuelled by injections of foreign liquidity into short-term deposits that in the good times were constantly replenished. As the value of the shilling has dropped, foreign money pulled from the capital markets has remained behind in banks, awaiting withdrawal at a more opportune exchange rate.

During 2009, these withdrawals of cash will expose our banks to refinancing risk, since the decline in asset prices is about to expose them to lower value for the security they hold against massively inflated loan books. Lower liquidity will mean sharp withdrawals of credit causing a downward spiral in deposits and a sharp jump in defaults. To replenish cash, our banks have no access to asset sales, and their holdings of T-bills are not infinite. There is no local derivatives market to have laid off interest rate risk, not to mention any bank facing currency rate risk with a falling shilling.

2009 Bailout?
 
There are certain banks in particular that pride themselves on having shown almost superannuated growth in lending on the back of the low-income earners in the country. Those loans are the likeliest to default first, and we are about to discover whether the investors who were allowed to back these banks are willing to tap into their reserves to pay up for new capital. Given the legal structure of the transactions involved is cause for concern. But not only one or two, every bank will needs it shareholders to step up. The likelihood is rising that a major bank in Kenya will fail and need rescue by the government before the end of 2009. Not because of criminal action, but because Kenya does not have a capital market capable of adequately generating and allocating capital in local currency.

 



Share this article with others:
Digg!Reddit!Del.icio.us!Facebook!Slashdot!Netscape!Technorati!StumbleUpon!Newsvine!Furl!Yahoo!Ma.gnolia!Free social bookmarking plugins and extensions for Joomla! websites!
Comments (1)Add Comment
Interesting but a little confused in parts
written by mainat, February 16, 2009
Interesting article though a little confused in parts. The debate about credit crunch and its impact on Kenya is I think still on-going. Obvious pointers will be remittances, fx rates and NSE volumes. According to CBK, remittances rose throughout 2008, but we’ll probably know for sure in the next 6 months. FX rates are looking interesting with pound nearing Ksh100 but $ going the other way-arbitrage? NSE volumes, most foreigners came in and left during Safcom’s IPO but otherwise their proportion is broadly similar to the pre-Safcom situation.
Not sure I follow your thought process on foreigners leaving balances with banks until fx rates are more favorable…
On npls and the banking sector. Equity just took a Ksh1bn loan loss provision hit and probably could and should have taking a greater hit. However, note it also paid out a higher DPS and spilt its shares. Not the actions of a bank fearing liquid and or capitalisation issues. I expect KCB and BBK to take circa Ksh2bn of loan loss provisioning.
I think our economy’s problems are mainly internally generated. Thus, the economy will suffer from these problems not being fixed fast enough with the foreign factor being an added problem.
report abuse
vote down
vote up

Write comment

busy
 

U.S.E Share Price Movement

COMPANY PRICE (UGX) CHANGE  
ALSI 1,060 0.00%  
BATU 330 0.00%  
BOBU 440 0.00%  
DFCU 805 0.00%  
EABL 5,021 0.00%  
EBL 701 0.00%  
JHL 5,542 0.00%  
KA 1,374 0.00%  
KCB 530 0.00%  
NIC 75 0.00%  
NVL 810 0.00%  
SBU 235 0.00%  
UCL 60 0.00%  
Last Trading Date Tuesday, 31 Aug 2010
Global Interlink Travel Services Ltd.
African is Cool online investor relations
Follow RatioMagazine on Twitter

Sponsored Links

News Stream