Shilling dips, NSE sheds Sh110bn after economy reopening

The shilling dipped against the dollar while the Nairobi Securities Exchange #ticker:NSE lost Sh110 billion in the week Kenya announced a phased reopening of the country from Covid-19 lockdown to stimulate the economy.

The value of all the stocks on the Nairobi bourse hit a three-month low of Sh2.02 trillion on Friday compared to Sh2.13 trillion on July 3 – ahead of the market factoring in news on the easing of the restrictions.

Analysts linked the NSE dip to foreign investors’ reduced interest in blue-chip stocks, arguing that most traders were fretting over the performance of market movers like Safaricom #ticker:SCOM and the big banks.

The high-net worth traders believe the effects of coronavirus will dim the earnings power of Safaricom’s M-Pesa and banks, says Sarah Wanga, head of research at AIB Capital, arguing that the investors are less optimistic of a quick turnaround with the reopening.

But merchandise importers and multinational companies stepped up purchase of dollars to meet obligations following the phased reopening amid the reduced inflows of hard currency, currency traders said.

This saw the shilling close the week at Sh107.10 to the dollar, compared with Sh106.61 on July 3 — moving above Sh107 for the first time since May 28.

Local traders expect the easing of travel restrictions and resumption of flights announced on July 6 to increase demand for products, triggering the need to import finished goods like cars and clothing and raw materials for businesses that have, since April, faced reduced cash flow.

President Uhuru Kenyatta on July 6 ended the cessation of movement in and out of Nairobi, Mombasa and Mandera.

He also allowed domestic commercial and passenger flights to resume operations on July 15 while international travel returns on August 1 in efforts expected to ease the pain of Covid-19 on the economy.

The pandemic has battered the economy and delivered mass jobs cuts with the Treasury projecting growth to slow to 2.5 percent this year from 5.4 percent last year.

But foreign investors who drive the NSE are less optimistic on the reopening of the economy, changing the fortunes of blue-chip firms like Safaricom, Equity Group #ticker:EQTY, KCB Group #ticker:KCB, Cooperative Bank #ticker:COOP and East Africa Breweries Limited #ticker:EABL.

The five counters influence the Nairobi bourse and account for nearly 80 percent of the value of all stocks on the NSE.

“Foreigners increased their net selling in the week. There is concern over performance of the market in general factoring in issues such as how companies will perform in the current environment,” said Ms Wanga.

“It may take a while for investors to start buying into the partial reopening of the economy given firms such as banks are still likely to see a continued rise in loan defaults and credit restructuring.”

Banks had restructured loans worth Sh679.6 billion or 23.4 percent of the total loan book by end of May due to the coronavirus economic hardships that have hurt the borrowers’ ability to repay.

The Central Bank of Kenya (CBK) and bankers are yet to comment on the potential impact of the loan restructuring on the lenders earnings this year.

Safaricom , KCB , Cooperative, Equity and EABL accounted for about 91 percent of the paper wealth erosion or Sh100.4 billion loss over the past week, underlining their dominance of the NSE.

The blue-chip stocks are a favourite of foreign investors who in recent weeks have sold their equity holdings.

Safaricom’s share price declined 7.2 percent to Sh27.50 in the week to Friday. This saw the company shed Sh86.1 billion of its market value.

Co-op Bank shed Sh3.81 billion while KCB lost Sh3.77 billion), EABL (Sh3.55 billion) and Equity (Sh3.21 billion).

“Foreign investors seem to be concerned about the M-Pesa revenue given the extended fee waiver on transactions of up to Sh1,000. First half numbers for M-Pesa may not be very impressive,” said Ms Wanga.

Safaricom looks set to forego revenues estimated at losses of up to Sh16.2 billion in the nine months to December after the CBK extended the waiver on mobile money transaction fees under Sh1,000 to the end of the year.

The Sh16.2 billion is equivalent to about a fifth or 19.1 percent of M-Pesa’s annual sales, underlining the impact of the pandemic on Safaricom’s earnings.

The free service aimed at cutting down on the handling of cash and the attendant risk of Covid-19 being transmitted from person to person.

The order also affected commercial banks, which had on March 16, removed charges for customers moving money between their mobile wallets and bank accounts.

The lenders are also set to lose billions of shillings with Equity Bank saying it is losing Sh120 million monthly due to the free service.

Ms Wanga reckons that Covid-19 data will continue to influence the performance of the NSE, especially if the cases spike with the reopening.

Kenya had confirmed 10,105 cases of the coronavirus with 185 total deaths by Sunday.

Mr Kenyatta said the State will review the cases after 21 days and threatened to return to lockdown if the cases rise sharply.