Struggling stock market sign of ailing economy

The stock market serves as a barometer of the country’s fiscal health and the pulse of the economy’s ups, downs and trends.

It serves as a benchmark for Kenya’s financial underpinnings and a signal for the state of the economy.
Seeing that nearly 30 percent of companies listed on the Nairobi Securities Exchange (NSE) are facing financial constraints therefore means that our financial architecture is warped and needs to be carefully turned around.

The companies may experience difficulties in continuing their operations and paying dividends.

This reveals the close connection between the financial constraints faced by businesses and how it relates to state activity in the local market and rising interest rates.

The burden on these companies that cannot meet their short-term obligations also speaks to what other companies are going through and paints the bigger picture for most companies.

Most distressed companies come from productive sectors such as autos and accessories, investment services and manufacturing, trade and services, construction, energy and petroleum.

Unfortunately, the ongoing civil war has hit economic activity and seems to have further dampened investor interest in stocks and business in general.

Worryingly, the economic infrastructure and health of the private sector appears to revolve closely around that of the government. Every time things go wrong, institutional investors on the stock exchange exit the market, eroding billions in paper money from local stocks.

This is partly due to the fact that the stock market is currently 50.01 percent majority owned by foreign investors, with stockbrokers owning a paltry 17 percent of the shares, which could explain why it suffers when there is a little bit of trouble.

Recent data from the Central Bank of Kenya shows that annualized net inflows in the first quarter of 2023 fell 34 percent ($345 million) to $660 million, compared to net inflows of $1 billion in the same period in 2022.

For a government looking for a combination of a dip in inflows and negative working capital, the environment is not conducive for companies to grow so fast to support the economy.

The reason for this is that the government has a budget deficit according to its national accounts, and therefore it has to borrow from the domestic or external financial markets to bridge the deficits.

Unfortunately, government borrowing is causing other macroeconomic problems in the economy, and the World Bank has already warned of heavy borrowing pushing the private sector out of the local debt market.

The taxpayer faces a challenging economic environment, as witnessed last financial year (2022/23), in which the Kenyan tax authorities noted that taxpayers showed resilience by paying their taxes to support growth.

For the period July 2022 to June 2023, the authority managed a revenue collection of Sh 2.17 trillion, compared to Sh 2.031 trillion in the last fiscal year, which was higher than what was collected in fiscal year 2021/22 with Sh 135 billion. However, it falls short of the ambitions of the government that had its eye on nearly 3 trillion sh.

The truth as served by the Bretton Woods institution is that as the Treasury continues to compete with households and merchants for credit, commercial banks will not reach their optimum level to support investment, which is a concern for distressed companies. This ultimately catches up with the government when it comes to declining tax collection.

In addition to competition for credit with the state, private sector lending also faces other risks in the second half of the year, including rising interest rates and deteriorating asset quality in banks due to higher loan defaults.

For example, rising commercial bank lending rates based on a higher central bank benchmark lending rate, which rose to 10.5 percent at the end of June when new governor Kamau Thugge took office, from 9.5 percent earlier.

Furthermore, the introduction of risk-based credit pricing by banks is expected to result in more expensive loans for borrowers with a higher risk profile.