Why Foreign Investors Are Putting More Money in Govt Bonds - Report

Kenya's capital markets experienced a dynamic second quarter in 2024, with a dramatic surge in bond trading volumes and fluctuating equity market performance, according to the latest Quarterly Market Analysis Report from the Kenya Institute for Public Policy Research and Analysis (KIPPRA).

The report from KIPPRA highlights a significant rise in bond trading activity at the Nairobi Securities Exchange (NSE) during the April-June 2024 period. The total volume of bonds traded reached an impressive Ksh287.6 billion, marking a 195 percent increase compared to Ksh147.4 billion recorded during the same period in 2023. This surge reflects heightened investor interest in the bond market, possibly driven by the search for safer investment options amid economic uncertainties.

The Kenya 2024 Eurobond yields exhibited an upward trend throughout the quarter. The yields began at 9.1 percent in April, climbed to 9.3 percent in May, and reached 10.3 percent by the end of June 2024. According to KIPPRA, the rising yields indicate increased risk perceptions among investors, possibly due to global economic factors and concerns over Kenya’s fiscal position.

On the equities front, the NSE20 share index experienced a challenging quarter, showing a general downward trend. The index declined by 5.5 percent, starting at 1,752.43 points at the beginning of April and falling to 1,656.50 points by the end of June 2024. KIPPRA said this downward movement was marked by fluctuations driven by varied investor sentiment influenced by economic uncertainties and volatile market conditions.

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Market capitalization at the NSE also saw significant volatility during the quarter. The capitalization declined by 2.97 percent, from Ksh1.76 trillion at the beginning of April to Ksh1,71 trillion by the end of June 2024. 

However, the quarter witnessed highs and lows, with the market capitalization peaking at Ksh1,801.83 billion and dipping to Ksh1,623.79 billion. Notably, compared to the same period in 2023, market capitalization increased from Ksh1,666.29 billion in June 2023 to Ksh1,710.64 billion in June 2024, which KIPPRA noted underscores a period of active investment and a generally positive long-term investor sentiment.

Foreign Investors Show Confidence 

Despite the challenges in the equities market, foreign investors maintained a net buying position. Total foreign purchases amounted to Ksh11.6 billion, surpassing foreign sales, which totaled Ksh8.6 billion during the April-June 2024 period. 

KIPPRA added that this net buying position indicates continued confidence in Kenya's market by foreign investors, despite a decline in average foreign participation in equity turnover from 61.0 percent in the first quarter to 34.6 percent in the second quarter. 

The report attributes this decline to an increase in equity turnover, which jumped from Ksh18.5 billion in January-March 2024 to Ksh29.1 billion in April-June 2024, reflecting improved business conditions and a recovery in economic activities that boosted liquidity and investor confidence. 

The KIPPRA report didn't say if the anti-tax protests contributed to the decline in average foreign participation in the equity turnover in the second quarter. 

KIPPRA also provided insights into regional market performance. African markets reflected diverse performances, with South Africa’s FTSE All Share Index, Egypt's EGX30, and Nigeria's NGSE30 recording gains, while Kenya's NSE20 Index suffered a 5.5 percent decline.

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Kenya's Treasury Bill Rates Surges

KIPPRA's report also reveals a significant rise in Treasury bill rates across all maturities. 

The weighted average rates for the 91-day, 182-day, and 364-day bills stood at 16.0 percent, 16.6 percent, and 16.7 percent, respectively, in April-June 2024. This is a stark contrast to the same period in 2023 when these rates were significantly lower, at 10.7 percent, 10.9 percent, and 11.3 percent. 

The substantial increase reflects the government's higher borrowing costs in 2024 as it seeks to meet its financing needs amid ongoing economic pressures.

As of August 2024, figures from the CBK website show that the Average Interest Rate of 91-day Treasury Bill has dropped to 15.8% while the 364-day Treasury Bill increased to 16.9%. 

Borrowers Hurt As Lending Rates Remain High

The recently published KIPPRA report also highlighted a noticeable rise in lending rates during April and May 2024, which climbed to 16.5 and 16.6 percent, respectively. This represents a significant uptick from the 13.1 and 13.2 percent observed during the same months in 2023. 

KIPPRA added that the rise in lending rates is likely tied to the overall tightening of monetary conditions, as financial institutions pass on the higher costs of borrowing to consumers.

Kenya's central bank cut its benchmark lending rate by 25 basis points to 12.75% early, marking the first reduction in four years. This move comes as the Central Bank of Kenya (CBK) seeks to gradually ease its policy stance while ensuring continued exchange rate stability. 

According to the CBK website, lending rate stood at 16.85% as of June 2024. 

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Elsewhere, the KIPPRA report revealed that the private Private sector bank credit in Kenya grew by 13.6 percent during January-March 2024, up from 12.2 percent in the same period in 2023. 

KIPPRA noted in the report that the proportion of public sector credit remained stable at 38.0 percent during the first quarter of 2024.

The report also highlighted that credit to the manufacturing sector accounted for 9.9 percent of total credit in the January-March 2024 period, an increase from 9.5 percent in the same quarter of 2023. This uptick points to renewed investment in manufacturing.

KIPPRA, the Kenya Institute for Public Policy Research and Analysis, is a state corporation that provides policy advice to the Kenyan government by conducting research and analysis to support national development goals.

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