The state of NSE in 2021
The state of the stock market or a securities exchange is tied to the economy of its respective country and the activities of the citizens of that country. While the day-to-day actions of a stock market don’t reflect the economic activities of a country, the long term actions do. And thus, to determine the state of the Nairobi Securities Exchange for the year 2021, it is important to examine Kenya’s economic outlook for the future.
Recent macroeconomic & financial developments
Kenya’s economy, like every economy around the world, has been hurt by the global health crises. In 2020, GDP growth was expected to see a deceleration from 5.4% in 2019 to 1.4%. Growth has been supported by agriculture while the weaknesses in industry and services have caused a dampening effect. Domestic demand has been restrained while external demand has neither aided or infringed upon growth. Extensional budgetary, monetary, and financial policy allotments were introduced to alleviate the impact of the global health crises on households and businesses.
In keeping with the happenings of 2020, analysts expected inflation to slow to 5.1% due to lower demand in aggregate. In the meantime, the fiscal deficit was predicted to broaden to 8.3% of GDP – a byproduct of revenue deficiencies and global health crisis spending to combat health issues and alleviate the damage that households and businesses were exposed to. 2020’s deficit saw a decline to 5.4% of GDP, backed up by a downward trajectory in the oil import bill. In addition, foreign exchange reserves decreased from $8.96 billion to $7.8 billion at the end of November.
The local currency also took a knock by 8.9% and in terms of the financial sector, the capital market was hardest hit. Between September 2019 and September 2020, the Nairobi Securities Exchange share index fell 20% while market capitalisation dropped by 2% during the same period. Compared to share prices in the UK, specifically the FTSE100 index, which fell by 14.3% in 2020, it becomes quite apparent that Kenya’s financial woes outweighed those of the global market. It is estimated that almost 2 million succumbed to poverty while almost 900,000 became victims of unemployment. In essence, the pandemic seriously damaged the social fabric of Kenya.
Growth outlook & risks
In terms of growth for the future, the outlook is positive. Projected economic growth for 2021 is 5.0% and for 2022, that number should climb to 5.9%. This rebound is based on the assumption that economic activity will normalise for a number of reasons. First, there’s the hoped for successful implementation of the Economic Recovery Strategy, and then there’s the expectation that Kenya will capitalise on expected movement in external liquidity and benefit from its initiatives to meet external financing needs.
Such external initiatives might include restructuring and debt service relief, additional concessional loans, and debt refinancing. With regards to inflation, the Central Bank of Kenya is aiming for a target range between 2.5% and 7.5%. In addition, due to improved revenue collection and exports, the fiscal and current account deficits are expected to slim down. Downside risks that could impede upon the positive outlook for the future include a failure to secure external financing to execute the budget, a full reopening of the economy, global growth slowing down, and agitated social conditions amidst the run-up to the 2022 elections.
Funding issues & options
Between 2019 and 2020 pubic debt surged from 61% to 72% of GDP, spurred on by debt management–related challenges, public investment in infrastructure, and the global health crises. As result, the International Monetary Fund has determined that Kenya is now at high risk of debt distress. In order to address the emerging fiscal and debt vulnerability risks would require concessional credit, the soliciting of external financial assistance, growth-friendly reforms, and debt restructuring and refinancing.
The following reforms could be considered growth-friendly: formalizing the informal sector, improved tax compliance, expanding the tax net by analysing the catalogue of tax-exempt and zero-rated items, making sure that public expenditures attain their designated targets, and expanding the local financial market so that is can in turn support public and private sector growth.