Aggressive interest rate rises by major central banks in the developed world are causing pain to Kenya’s businesses, households and investors through costly loans, losses at the Nairobi bourse and weakened shilling.
The market outlook turned gloomier this week after the Bank of England and the Swiss National Bank followed the US Federal Reserve in pushing up interest rates to tackle soaring inflation.
In the UK, the Bank of England raised rates for the fifth consecutive time while the Fed delivered its first 0.75 percentage point rate rise since 1994, with the aftermath echoing thousands of miles in emerging economies such as Kenya.
Experts say the rate hikes in the developed world are encouraging capital flight from developing economies, raising the rates on sovereign debt and destabilizing their currencies.
These effects have started to reflect in the Kenyan economy.
Investors, particularly foreigners, are shifting their money from the Nairobi Securities Exchange (NSE) to western capitals as they find investments in their rates more attractive, pushing the bourse to multi-year lows.
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Treasury cancelled the sale of Sh115 billion Eurobond on surging yields on international markets in what will push the State to borrow more from the domestic market, ultimately putting pressure on bank lending rates.
Another danger to emerging economies like Kenya in a rising interest rate environment is currency depreciation, which is already causing pain to importers and transmitting inflation through costly imported goods like fuel, cars and industrial raw materials.
“Investors are finding markets such as Kenya least attractive after adjusting for risks and returns due to the Western rate hikes, said Eric Musau, executive director for research at Standard Investment Bank.
“The rate hikes are the main reason behind the slump witnessed in recent weeks at the market.”
The stock market has suffered one of its worst weeks since the outbreak of the coronavirus pandemic, as investors take fright over aggressive interest rate rises by major central banks and the threat of a prolonged economic slump.
The value of all stocks stood at Sh1.965 trillion compared to Sh2.636 trillion at the start of the year, wiping out Sh757 billion of investor wealth since January. Kenya last saw this level of valuation five years ago.
The NSE-20 Share Index closed at 1,644 points, a 19-year-low.
The benchmark US 10-year bond rate — a closely watched gauge of market inflation expectations over the next decade — has climbed to 3.33 percent, levels witnessed over a decade ago.
This has sent stocks tumbling across the globe as investors pulled out of equities on the expectations that inflation would surge.
Smaller markets like the NSE have taken deeper hits because investors, particularly foreigners, get attracted to the western bonds and equities that are viewed as safe havens in times of global uncertainty.
The roaring consumer demand and supply-chain crunch stemming from the Covid reopening, combined with the energy price spiral generated by Russia’s invasion of Ukraine, has pushed inflation to decades high in the western world
US inflation is running at an annual pace of 8.6 per cent, the fastest in more than 40 years. For the eurozone, it is 8.1 per cent and in the UK, 7.8 per cent. Central banks are being forced to act far more aggressively.
Similar price pressures have hit the Kenyan economy, where prices of essential food items such as flour and cooking oil have risen sharply, pushing inflation to a 28-month high of 7.1 percent.
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Over the past week, foreign investors withdrew a net of Sh1.4 billion from the bourse, pulling down the prices of blue-chip stocks that are popular with this category of traders to more than one-year lows.
The capital flight when combined with increased demand for dollars adds pressure to the weakening of the local currency against the greenback, reducing purchasing power and increasing the difficulty of servicing debt denominated in foreign currencies, such as the US currency.
The shilling was exchanging at an average of Sh117.23 units to the dollar on Friday based on official rates, having depreciated from Sh113.13 at the start of the year and Sh104.44 at the end of March 2020.
Demand for dollars locally has gone up significantly this year in line with surging imports following the full reopening of the economy, which has unleashed pent-up demand for both consumer and capital goods.
The debt market is also feeling the pinch of the realignment in global capital flows, exposing poorer nations to higher costs of borrowing on their perception as high-risk markets.
Treasury’s director in charge of debt management Haron Sirma says Kenya will pursue short-term bridge financing from banks, domestic borrowing through T-bills and bonds and expenditure cuts as options after the collapsed Eurobond.
Treasury said Eurobonds had become expensive in the wake of Russia’s invasion of Ukraine and the resulting rate hikes in the West, forcing Kenya to reconsider issuing a bond.
The Eurobond rates have more than doubled over the past year to over 12 percent compared a six percent a year ago.
The option of tapping the domestic market as an alternative to the Eurobond look set to pile pressure on Treasury bill rates, setting up costly credit for homes and businesses in a recovering economy.
The government’s increased borrowing from the domestic market in recent weeks has pushed the benchmark 91-day Treasury bill yields from 6.86 per cent in June last year to 7.9 percent, forcing bankers to match it in an attempt to encourage larger depositors to leave their money with banks instead of lending to the State.
The rate on the 364-day T-bill, for instance, has increased to 9.96 percent in the recent auction, from an average of 7.51 percent a year ago.
This has forced banks to raise the rates for wholesale deposits and ultimately pass on the additional costs to consumers in the form of expensive loans.
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Bank lending rates hit a 27-month high in April as costs of wholesale deposits increased in the wake of competition for funds between lenders and the government.
The average lending rate rose to 12.2 percent in April — the highest level since January 2020, Central Bank of Kenya (CBK) data shows.
“The T-bills are rising and the industry is facing pressure to increase lending on the high cost of deposits,” a CEO of a top bank told Business Daily while seeking anonymity for fear of CBK reprisals, adding that the rates will rise in coming months.
The higher cost of loans, however, risks locking out businesses from accessing the credit they need for expansion and in turn, creates more jobs.