Kenya is facing an imminent economic crisis as inflation continues to surge. This is piling pressure on the government as citizens keep coping up with high prices of food, electricity, and fuel.

The country’s economic meltdown, in turn, looks to trigger a credit crisis and a risk of defaulting on its loans. This comes amid the challenges facing the Kenyan shilling, which has maintained its downward spiral against the US dollar.

Despite a minimal ease in the inflation rates from 9.2% in March to 7.9% in April, and the Kenyan government’s assurances of projected growth, for many people, improvement in the prospects of the East African country’s economy remain a mirage.

On May 12, credit rating company Moody’s downgraded Kenya’s credit rating from B2 to B3, driven by an increase in government’s liquidity risks. This means that it will be more difficult to acquire loans, and if secured, the loans will attract higher interest rates for the country. Moody’s also lowered Kenya’s local currency country ceiling to Ba3 from Ba2.

With earlier indications pointing towards these end-results, and a persistent bear run at the Nairobi Securities Exchange (NSE), the Business Daily reports that investors have been seeking alternative investment options to cushion themselves from the economic doldrums that the East Africa’s biggest economy now finds itself in.

*(The New York Stock Exchange / Photo by NODO News)*

The flight of inventors from the NSE is attributed to a weakening Kenyan shilling and a difficulty in accessing dollars. These factors are in turn hurting returns and making it difficult to attract new capital to the market. Investors at the Nairobi bourse are selling their shares, and investing in US stocks.

“The weak performance of long-term government bills has been a cause for concern among investors. Many have [even] expressed reluctance to lend to the government for extended periods, resulting in massive undersubscription of most of the bills issued,” Eric Jackson, the co-founder and CEO of stocks trading and investment platform, Hisa told NODO News. “The government may need to restructure these bills to restore investor confidence.”

Jackson, however, is optimistic of some relief towards the end of the year, with a decrease in inflation anticipated due to better food harvests following favorable rains. Investment activity, he also mentioned, is considerably picking up especially between April and May after a slow first quarter.

Kenyans Want to Diversify Investments

*(Hisa Inc co-founders Eric Jackson (left) and Erick Asuma (right) / Photo by Hisa)*

“This surge in investment can be attributed to various factors, including the improved performance of US markets and the growing trend among Kenyans to diversify their investments beyond money market funds, which mainly invest in government bonds, as well as treasury bills and bonds.” Jackson indicated.

And while the shilling could, therefore, likely stabilize, it may still linger within the 130-140 range against the dollar by the end of the year, indicating that local middle class investors will more likely be still stuck with a weak shilling, and hence be more invested in the US stocks and ETFs, which present a lucrative investment option.

With 25,000 active users currently, Hisa is a platform that deploys blockchain technology to enable its users to affordably invest in stocks and securities in not just Kenya but also across other global money markets like those in the US.

Jackson told NODO News that the platform has continued to see significant growth in the number of its users who are now switching to investing in US stocks and ETFs.

“This is mainly driven by the substandard performance of government bonds among local retail and institutional investors,” Jackson said. “Furthermore, retail investors are increasingly becoming more vigilant in safeguarding their investments against currency devaluation and the potential risks associated with government uncertainties.”

More Investments in Dollar Assets

He expressed his adamantium belief that Hisa will attain a user base of 100,000 by the end of the year, and that a considerable number of these users will invest in dollarized assets to hedge themselves against the steadily rising inflation.

“Besides, there is a growing interest among institutions to divest their investments globally and we, consequently, are now in the process of onboarding investment groups, SACCOs, investment banks, and fund managers to provide investors with an opportunity to invest in US stocks and ETFs,” Jackson said.

In March, Kenya’s 2023 economic growth which had previously been projected to be 6.1% was revised to 5.8% – a considerably slower growth- by the then Central Bank (CBK) governor Patrick Njoroge.

Currently, the country’s domestic funding conditions have worsened considerably over the past two months, with very low net domestic issuance contributing to financing shortfalls and delays in government spending, according to Moody’s.

Even though the demand for domestic debt issuance will likely improve, it will remain sensitive to government economic policies, particularly related to fiscal consolidation, and external financing conditions.

-Edited by Shigeru Sato