BY KOSTA KIOLEOGLOU
Kenyan stock market took a beating in 2018; with most investors reaping losses as securities ended the year lower than they started in January, pulling down key indices with investors’ wealth declining by $4.1 billion.
Market giants of the previous decade are now struggling to survive. Banks, super markets, cement companies, real estate companies, fashion retailers amongst others weighed down by debt and losses over the last years are desperately trying to find support and cash flow injections in order to survive and avoid closure.
The challenges that Kenya’s economy is facing create a domino effect, which affects all market sectors and especially those who were over inflated such as the real estate and the stock market. People and companies fail to pay their liabilities and debts increasing the number of auctions day after day. In the year 2018, newspaper and web pages were filled with notices of auctions. A quick check indicates that more than 90% of the auctions had to do with real estate developments. This is a clear sign that the property industry is not only producing profits but is also creating unbearable debts and losses. All available data indicate a market slow down. In addition to this is the fact that the value of building plan approvals reduced drastically in the last 10 months compared to a similar period in 2017. The worst was October 2018 when the value of approvals dropped by almost 44% from Sh22 billion in October 2017 to Sh9.6 billion.
This is just the beginning of a downhill course for the real estate market. The bigger the bubble the more negative consequences have to be expected from the bubble burst. Apart from the fact that illegitimate cash could have found its way into the property market, distorting prices, there is nothing else that could explain the reason why Kenya’s property market was rising so much and fast over the last years. The increased appetite for quick and easy returns led the majority of Kenyans to invest directly or indirectly in the property market via various available schemes such as investment groups, chamas, saccos and joint ventures, which, in several cases, were not properly regulated and did not protect the investors from market manipulators.
The recipe of the bubble was simple. Irrational investments by a large number of amateur investors who were manipulated into risking their family savings in a market, which could not afford the properties that were offered. Ignorance together with complete lack of investment mentality and risk understanding created a huge bubble and created huge losses, which are now unveiled day by day suffocating the market and affecting all economic sectors and leading to an unavoidable recession. Unless we address the issue of market liquidity, all sectors of the economy, not just real estate, will suffer.
All these developments are happening amid huge volatility around the global markets. Kenya has always been depending on foreign help and is vulnerable to global turbulences. 2019 is expected to be a difficult year for all the markets around the world. According to the World Bank’s 2019 Global economic Prospects report, the outlook for the global economy in 2019 has darkened. International trade and investment have softened. Trade tensions remain elevated. Several large emerging markets underwent substantial financial pressures last year. Against this challenging backdrop, growth in emerging market and developing economies is expected to remain flat in 2019. The pickup in economies that rely heavily on commodity exports is likely to be much slower than hoped for. Growth in many other economies is anticipated to decelerate. In addition, risks are growing in a way that the growth could even be weaker than anticipated.
Higher debt levels have made some economies, particularly poorer countries, more vulnerable to rising global interest rates, shifts in investor sentiment, or exchange rate fluctuations. In addition, more frequent weather events raise the possibility of large swings in food prices, which could deepen poverty. Because equitable growth is essential to alleviating poverty and increasing shared prosperity, emerging market and developing economies such as Kenya need to face this challenging economic climate by taking steps to sustain economic momentum, readying themselves for turbulence, and foster long-term growth.
Kenya is at risk of defaulting on its external loans, with the World Bank comparing it with countries that are highly indebted. In its latest statistics on external debt, 2019, the global lender has noted that Kenya’s future debt service payments will rise steeply in the next three years, the same way Ghana’s, Zambia’s and Ethiopia’s did. The three are teetering on debt default.
The country’s debt service payment for 2019 has been aggravated by the need to retire three commercial loans maturing in the first six months, including a bullet repayment of about Sh78.3 billion of the debut Eurobond in June.
Also within this period, taxpayers are expected to repay two syndicated loans including Sh78.7 billion to Standard Chartered Bank and another Sh37.1 billion to Trade and Development Bank, formerly PTA Bank, bringing the total commercial loans to be paid in six months to Sh200 billion.
In total, the country’s external debt redemption for the current financial year stands at Sh250.3 billion. The debt repayment rose due to the increase in the stock of expensive loans from the commercial banks as well as sovereign bonds such as the Eurobond. Additionally, Kenya is among the countries that have dipped into the international capital markets, having issued Eurobonds worth Sh475 billion since its debut in 2014.
According to the World Bank, countries such as Kenya, which have not considerably grown their export earnings, will struggle to repay their maturing Eurobonds in the next three years.
A chunk of Kenya’s expensive external loans are denominated in foreign currencies increasing further the risk for a possible future default. In 10 years to September 2018, Kenya’s share of external debt has increased almost six-fold from Sh432 billion to Sh2.6 trillion.
Kenyans, in order to cover the country’s needs to repay its debts, are now facing increased direct and indirect taxation, which is limiting their average buying power.