[2008-07-18]  Safaricom Foreign Sell Orders Force Shilling to Lose Ground
The privatisation of Safaricom may have put the Kenyan capital market on the world map, but this close attention by global hedge funds and security traders is coming at a heavy price.

Since the company was listed, the Nairobi Stock Exchange (NSE) has seen a deluge of foreign trade transactions that seem to have eclipsed trading in the entire market.


Trading volumes that used to be realised over a year - particularly in the pre-boom period - are being realised in days.

But in as much as this has lifted the fortunes of the small club of stockbrokers, the surge in short term inflow of foreign capital could have a destabilising effect on the shilling's exchange rate.

Experts say that while the local financial market is more sophisticated compared to most countries in sub-Saharan Africa, Kenya's securities market is too shallow and illiquid, compared to other emerging markets like South Africa where there is a strong network of market makers who help smoothen security trading.

The risks that a small economy, with a financial market that is still in the early stages of evolution is exposed to when it suddenly attracts the kind of money Safaricom pulled is now becoming clear in Kenya in the second month of trading.

The need for the country to develop the capacity to handle big money without catching a cold is also becoming apparent as the country positions itself to become a major financial hub in Africa.

Analysis of the trading patterns and capital flows into the NSE since Safaricom listed shows that most of the money brought in by foreigners into the initial public offering (IPO) had a speculative motive as they have been selling and getting out every day.

Large chunks

The total foreign selling and buying have on average been at 51 per cent of the total turnover on the counter although the setting aside of large chunks of the Safaricom shares to international investors had been made on grounds that they would help stabilise the share price.

On the normal board (as opposed to trade on the much smaller prompt board), the total foreign selling and buying have on average been at 51 per cent of the Safaricom total turnover after the country attracted unprecedented international interest.

Foreign investors were allocated shares worth Sh11 billion, though the total bids for this stake amounted to Sh76 billion.

But during the past 27 days that Safaricom has been trading at the Nairobi Stock Exchange, foreigners have traded shares worth Sh7.36 billion out of the Sh14.54 billion. During this period, the value of buy orders stood at Sh1.7 billion while the value of sales stood at Sh5.6 billion.

Morgan Stanley International, which acted as the joint transaction advisor to the Kenyan Government allocated itself over 800 million shares from the foreign investor's pool, which is 41 per cent of that stake.

From the beginning, a sizeable allocation for foreign institutional investors was preserved because they were expected to provide a stabilising force as the share started trading.

But the reality emerging is that foreign investors, who generally hunt for outsized returns for the risks involved in investing in frontier markets like Kenya have mainly been interested in profit taking.

Huge demand for shares among local fund managers has, however, helped stabilise the price, despite massive foreign sales. If this trend continues, it may take time before the block of shares held by the likes of Morgan Stanley is contained.

Sell sell sell

Besides the attraction of Safaricom and the political turmoil that gripped the country at the beginning of the year, Kenya's should be a hot investment destination given that the NSE is up nine per cent - while most of the developed world indexes are down - and the local interest rates in the bond market are competitive starting at 8.75 per cent to 14.5 per cent.

Safaricom provided the natural entry, which has seen returns going as high as 45 per cent for foreigners who bought at Sh5.50 but have seen prices reach Sh8.

However, the little interest by funds that specialised in African markets (which has helped stabilise the market), trading in Safaricom shares has been mostly foreigners selling what they were allocated to take advantage of the arbitrage opportunities afforded by the rapid appreciation of the share price by over Sh2 since it was listed.
The impact of this heavy profit taking by foreign investors has been to depress the price and has had a depreciation of the shilling since June. If this trend continues, it could have a big impact on the economy, as a weakening shilling sparks inflationary fires and slows down growth.



Source: allafrica