Nairobi - It was described as Kenya’s Brexit moment, a decision that had the potential to spur a withdrawal of foreign investors, sending the stock market and the shilling tumbling and damaging East Africa’s most-developed economy.
Yet, almost six weeks after Kenya capped banks’ lending rates at four percentage points above the central bank benchmark, its currency is little changed against the dollar and the main stock index has gained on 14 of the past 17 days.
Foreign investors have been net buyers of Kenyan stocks for the past four weeks, accounting for 83 percent of trading in the five days ended Sept. 30, according to Nairobi-based Standard Investment Bank. The shilling is the sixth-best performing African currency this year against the dollar, just as it was on Aug. 24 when President Uhuru Kenyatta signed the law on bank lending rates, designed to stimulate lending.
“Kenya is an interesting market in terms of the resilience of the economy,” Elizabeth Irungu, chief investment officer at Nairobi-based Britam Asset Managers, which oversees about 107 billion shillings ($1.1 billion), said in an interview. Banks are already revamping their business models, seeking to regain the returns achieved before the cap, she said.
The market reaction isn’t what some expected.
Money manager and real estate firm Cytonn Investments compared the new law to the U.K.’s vote to leave the European Union and predicted that Kenya’s stock market would tumble as foreign investors exited banking stocks. The pound fell a record 8.1 percent against the dollar and U.K. stocks fell as much as 8.7 percent when the Brexit result was announced June 24.
John Gachora, chief executive officer of NIC Bank Ltd., among the country’s 10 largest lenders, has said he is concerned the cap on lending will lead to a fixed exchange rate, the sequence that followed similar moves in Zambia, Nigeria and India, because of ripple effects from the policy. Banks in such markets resorted to lending in foreign currencies whose rates weren’t capped, leading to weakness in the local currency and prompting foreign-exchange regulation, Gachora said.
There have been few signs so far that that will be necessary. The shilling has been supported by rising earnings from tourism, with arrivals up 13 percent in the first half of the year, and from tea, with the country producing a record crop after good rains. Helped by lower oil prices, the Kenyan central bank has accumulated $7.5 billion of reserves, enough to cover 5.2 months of imports and almost a record.
“At least in the short-term, the market doesn’t appear to anticipate any major impact on the local unit from the new laws capping lending rates,” said David Willacy, a London-based foreign-exchange trader at INTL FCStone Ltd. The central bank has been quick to reassure the market after major economic events this year, and “made it clear to the market they will not let any depreciation pressures build up against the shilling,” he said.
Central bank Governor Patrick Njoroge described the economy as “resilient and diversified” and said he expects 2017 growth “much higher than 6 percent,” in a Nairobi interview on Sept. 29.
While bank stocks tumbled in the wake of the Aug. 24 decree, they have pared their losses. Equity Group Holdings Ltd., the largest bank by market value, is down 14 percent after surging 20 percent in the past 10 days. KCB Group Ltd., the biggest lender by assets, has advanced 10 percent in the same period.
Njoroge contends that Kenya remains attractive to investors, even after the rate curbs, because returns on investments remain higher than elsewhere. The Nairobi stock market has drawn foreign inflows from offshore “bargain hunters” lured by reduced valuations since the cap, he said.
“Those people who are coming in to invest are running away from the 5 to 6 percent return on equity in Europe and the 15 percent return on equity in South Africa,” he said Sept. 21. “Even if returns in Kenyan banks fall down to 20 percent, from the historic 30 percent return on equity, there is still a lot of pick up.”
The shilling traded little changed at 101.27 per dollar at 7:32 a.m. in Nairobi on Monday.