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THE IMPACT OF POLITICAL REFORMS ON SECURITIES EXCHANGES KENYA S EXPERIENCE Mr. Chris Mwebesa Chief Executive 18th September 2006 at the 10th ASEA Conference – PowerPoint PPT presentation

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  • Mr. Chris Mwebesa
  • Chief Executive
  • 18th September 2006 at the 10th ASEA Conference

Table of Contents
  • Preamble Government of Kenya Reform
    Agenda-Economic Recovery Strategy
  • Macro-economic Reforms
  • Financial and Fiscal Reforms
  • Pension Sector Reforms
  • Institutional Reforms
  • Trade and Industry Reforms
  • Governance Reforms
  • Rehabilitation and Expansion of Infrastructure
  • Communication, Information, Technology
  • Transport
  • Energy
  • Water
  • Social Reforms
  • Impact of the reforms on the Economy
  • Impact of the reforms on the Nairobi Stock

Preamble Government of Kenya Reform
Agenda-Economic Recovery Strategy
  • The 27 December 2002 elections and the smooth
    handover of power that followed was historical in
    many ways, and was praised globally as an example
    of democratic maturity in an African country.
  • After 40 years in power the Kenya African
    National Union (KANU) lost a presidential
    election for the first time. The election was won
    on a reform agenda.
  • President Kibaki's victory, under the banner of
    the reformist National Rainbow Coalition (NARC)
    party, set the stage for long-awaited changes in
    the country's political, economic and social
  • The new NARC government inherited a country beset
    by economic, institutional and social failures.

Preamble Government of Kenya Reform
Agenda-Economic Recovery Strategy
  • According to the Nairobi-based Institute of
    Economic Affairs, Kenya was lagging at least 20
    years behind where it should have been in terms
    of development.
  • The new government would have to focus its
    energies on rebuilding institutions, and
    developing a meritocracy in which Kenyan citizens
    can feel empowered.
  • The new Government articulated its economic and
    social policies and objectives through a recovery
    strategy dubbed the Economic Recovery Strategy
    for Wealth and Employment Creation

Preamble Government of Kenya Reform
Agenda-Economic Recovery Strategy
  • The four ERS Objectives or pillars are
  • To establish and sustain macro economic
  • To strengthen governance
  • To rehabilitate and expand infrastructure
  • To invest in initiatives to build human
  • Reforms had to be formulated and implemented to
    achieve these objectives
  • Investments had to be made and given time to
  • The economic and social order had to be
  • The Government has remained committed to the ERS.
    Some of these reforms have been very beneficial
    to the Nairobi Stock Exchange.

Reforms to Establish and Sustain Macro-Economic
  • Interest Rate Management
  • Formation of the Monetary Policy Advisory
    Committee Chaired by the Governor of the Central
    Bank of Kenya the objective of the Committee is
    to formulate credible monetary policy, leading to
    a stable macroeconomic environment
  • The Central Bank of Kenya (CBK) introduced a new
    interest rate benchmark the Central Bank Rate
    (CBR) to be based on the inter-bank and repo
    rate. The CBR will be reviewed every 8 weeks at
    the meeting of the Monetary Policy Committee
    (MPC) of the CBK.
  • More recently on 28 August 2006, the CBK on
    behalf of the Government issued and listed on the
    NSE, Kshs. 3.82 billion (US 5.22 million) worth
    of a 12 year discounted fixed rate treasury bond,
    with a coupon rate of 14 (yield 13.75).
  • In order to further lengthen the maturity profile
    of domestic debt, the Government plans to issue a
    15 year treasury bond.

  • Budgetary Reforms
  • Increasingly the Treasury has reduced donor
    support for recurrent expenditure and in 2006 the
    Minister did not factor in any donor support for
    the recurrent expenditure component of the fiscal
    budget 2006/2007.
  • The deficit of Kshs. 29.5 billion (US 402.47
    million) will be financed via domestic borrowing
    which will continue to boost the domestic bond
  • Tax collection Use of electronic registers
    scanners, the simplification of the tax regime,
    coupled with buoyant economic growth, has led to
    enhanced tax compliance collections for the
    Kenya Revenue Authority and has reduced
    government appetite for domestic borrowing
  • Fiscal Reforms As an incentive to encourage more
    listings at the NSE, the Minister proposed that
    newly listed companies pay corporation tax at a
    lower rate of 20, for a period of 5 years,
    provided these companies offer at least 40 of
    their shares to the Kenyan public (2005)
  • Companies that apply and are listed shall get a
    tax amnesty on their past omitted income,
    provided they make a full disclosure of their
    assets and liabilities and undertake to pay all
    their future due taxes (2001)

  • The Retirement Benefits Authority
  • The Retirement Benefits Act was passed by
    Parliament in 1997
  • The first Board of the Retirement Benefits
    Authority (RBA) was appointed in 2000
  • The Role and Objectives of the RBA
  • Regulate and supervise establishment and
    management of retirement benefits schemes
  • Provoke development of new capital market
    instruments through the diversification of
    pension schemes investment portfolio
  • Encourage greater saving for retirement thereby
    increasing the country's savings rate from the
    current 8 to over 25 of GDP leading to capital
    deepening and therefore accelerate economic
  • The revised national accounts statistics show
    Kenyas domestic savings rate rising from 4.9
    of Gross Domestic Product in 2002 to 8.1 in
  • Spur the expansion of the country's capital
    markets through prudent professional investment
    of scheme funds

Pension Funds and the Capital Markets
  • The East Asian tigers achieved their double digit
    growths as result of increased savings and
    investment at levels in excess of 30 of their
    Gross Domestic products, notably Singapore and
  • It is instructive to note that South Korea per
    capita income in 1969 was lower than that of
    Kenya at the time. Today as a result of
    harnessing domestic resources and mobilizing
    saving, South Korea is a newly developed country
    while Kenya is still considered at best to be
  • While the classical theory that savings equals
    investment has long been disputed, it is indeed
    true that in most countries there is a very close
    correlation between the two and the level of
    capital markets development.

  • Continued Pension Sector Reform
  • Public Sector Pension Scheme The Civil Service
    Pension Scheme, created in 1942, by an Act of
    parliament purely for employees working within
    various arms of the government, was
    non-contributory and non-funded a typical
    payas-yougo scheme funded from recurrent
  • Cost the government Kshs. 17.2 billion (US
    234.65 million) annually or Kshs. 1.43 billion
    (US 19.51 million) a month.
  • The Government has since announced its intention
    to transform the Civil Service Pension Scheme
    (civil servants, teachers, armed forces) into a
    scheme that is contributory. The public sector
    currently employs over 600,000 Kenyans.
  • When achieved this will unlock huge pools of
    investment funds that will definitely boost the
    capital markets in Kenya and within the region.

  • Continued Pension Sector Reform
  • Lock-in of employer contributions for employees
    changing employment before attaining retirement
  • The retirement benefits assets under management
    totaled Kshs 128.0 billion (US 1.75 billion) in
    March 2006, up from Kshs 45 billion (US 613.92
    million) in December 2001
  • The pensions industry investments constitute
    about 9.59 of the equity market capitalization
    of the NSE and about 20 of all listed bonds in
  • The Minister has exempted from tax the investment
    income of the pooled funds or other investments
    of retirement schemes. This has widened the scope
    of relief as previously exemption applied only to
    individual registered pension schemes, pension
    funds and provident funds
  • We expect to see increased participation of
    pension schemes on the NSE.

  • Government Divestiture
  • Privatization Bill Legal and institutional
    framework for privatization of state enterprises
    and the divestiture of state assets passed by
    Parliament in August 2005
  • Minister for Finance indicated that as much as
    possible privatizations will be done through the
  • As part of the provisions of the bill the
    Treasury is in the process of creating the
    Privatization Commission that will continue to
    oversee privatizations
  • The government has also created the Bank
    Privatization Unit to co-ordinate ownership
    restructuring of the remaining state-owned
    financial institutions i.e. Kenya Commercial
    Bank, National Bank of Kenya, Consolidated Bank
    of Kenya.

  • Kenya Investment Authority Created out of the
    Investment Promotion Centre in 2005 to facilitate
    investment in the country. Investment Authority
    is a natural partner for the NSE and discussions
    have commenced on how both institutions can
    leverage off their synergies
  • Licensing Bureaucracy Ongoing efforts to
    identify and scrap licenses that hinder business.
    The Ministry of Trade and Industry is addressing
    the issue under the Repeals and Amendments Bill
    together with the 2006/2007 Finance Bills. There
    used to be 1347 licenses for conducting business
    in Kenya
  • In June 2005, the Minister for Finance proposed
    to eliminate 17 and simplify 30. In the 2006/2007
    Budget Speech 37 licenses were eliminated
  • With the enactment of the 2 bills into law, a
    total of 73 licenses will be eliminated
  • During the current financial year, there are
    plans to simplify and/or eliminate 700 licenses,
    these include the 600 licenses issued by Kenyas
    175 local authorities.

  • Regional Trade East African Community (EAC)
    Customs Union which unified and harmonized
    tariffs was completed in 2005 a firm foundation
    for a common market
  • The Customs Union agreement sets a common
    external tariff and calls for the progressive
    elimination of internal tariffs within 5 years,
    but, although it is being implemented, several
    teething problems have been encountered (in both
    technical and policy areas).
  • The East African Securities Exchanges Association
    (EASEA) As the technical advisory arm of the
    Capital Markets Development Committee of the EAC
    continue to pursue a single or merged market by
    lobbying law makers on a harmonized policy and
    fiscal incentives for capital markets in the
  • Concrete results include the fact that East
    African Breweries and Kenya Airways are both
    listed on all three East African securities
    exchanges, and Jubilee Holdings is cross listed
    on the NSE and the Uganda Securities Exchange

Reforms to Strengthen Governance
Governance Public Expenditure and Financial
Management Reforms
  • Public sector reforms are aimed at downsizing the
    public sector to make it
  • more efficient and investor friendly thus
    promoting private sector growth
  • and poverty reduction.
  • Enactment of the Financial Management Act 2005
    With the objective of enhancing transparency and
    accountability of the management of the public

Governance Ministerial Rationalization
  • Ministerial Rationalization Ministries functions
    and structures have been reviewed with non-core
    activities identified for privatization.
  • Information Technology Previously this sector
    was served by two incongruous ministries i.e.
    Transport and Communications on the one hand and
    Tourism and Information on the other, now
    information, communication and technology policy
    issues are dealt by one Ministry - Ministry for
    Information and Communication.
  • Policy has been developed to support
  • Given way to numerous opportunities in ICT, that
    can exploited using the Capital Markets as a
    source of funds.
  • Outsourcing BPOs and Contact Centres
  • Content Digitization and Databases
  • Infrastructure Fibre Networks and Technology
  • Distribution CDMA, WiFi, Wimax, IPTV etc.
  • Other Support Services. i.e. equipment assembly.

Governance Public Sector Reforms
  • Results based management was introduced in all
    Ministries in 2005. Performance contracts for
    the civil service were concluded in February 2005
    and in July 2005 for all state corporations
  • Revenues and more importantly net profits for
    state corporations has soared with many reversing
    loss positions. This was across the board and
    included reversed fortunes in all listed state
    corporations (9 of them)
  • The objective of reducing overall public
    expenditure has yet to be achieved.

Rehabilitation and Expansion of Infrastructure
Rehabilitating Infrastructure Energy Sector
  • Unbundling Restructuring of the energy sector
    through the unbundling of the KPLC into a
    separate transmission and distribution company.
    The unbundling of KPLC is being implemented under
    the Energy Sector Recovery Project (ESRP) funded
    by the World Bank and other multilateral
  • Management Service Contract Under the ESRP, the
    management service contract for KPLC was handed
    over to Manitoba Hydro International (Manitoba)
    of Canada. Manitoba will have to adhere to strict
    conditions including reducing system losses by 4
    at the end of the management contract in June
    2008, from a 18.8 loss in 2004 and
  • Raise the rate of new connections from 70,000
    realized in 2005 to 150,000 annually.

Rehabilitating Infrastructure Transport Sector
  • Transport Public transport was reorganized in
    2004 leading to increased investment in the area
    and improved safety conditions
  • Transport is now one of the leading sectors in
    the economy and despite the poor road network in
    the country, it contributed about 8 and 6 to
    GDP in 2004 and 2005 respectively.
  • Railways In another major development for the
    privatisation process, and certainly for
    transport infrastructure, Kenya and Uganda in mid
    October 2005 finally chose a concessionaire to
    run their joint 2,350 km railways.

Rehabilitating Infrastructure Policy Incentives
  • Interest income accruing to all listed bonds used
    to raise funds for infrastructure and, which have
    a maturity of at least 3 years, is exempt from
    withholding and income tax (2006)
  • Securitization based on bankable assets and
    ability to generate cash has become a viable
    alternative in most emerging markets,
    particularly for institutions providing
    infrastructural services to raise long term
  • In this regard, the Minister proposed to exempt
    investment income of Special Purpose Vehicles
    (SPVs) from income tax. This is to encourage
    institutions providing infrastructural services
    to set up SPVs for purposes of issuing asset
    backed securities (2005)

Social Reforms
Social Reforms
  • Budgetary allocation to the social sectors
    continues to rise consistent with
  • governments commitment to invest in initiatives
    that will build human capital
  • and reduce poverty.
  • Education Free primary education was introduced
    in 2003 and grants for infrastructure development
    for primary schools introduced.
  • In 2006/2007 budget 27 of total expenditure
    Kshs 99 billion (US 1.35 billion)) was
    allocated to education
  • Healthcare has increased from 8.6 of total
    expenditure Kshs 30 billion (US 409.28 million)
    to 9.4 of total expenditure Kshs 43 billion
    (US 586.63 million) in 2008/09

Social Reforms Policy and Tax Incentives
  • Interest income accruing to all listed bonds used
    to raise funds for social services, and which
    have a maturity of at least 3 years, is exempt
    from withholding and income tax (2006)

Impact of the Reforms on the Economy
GDP Growth 2000-05
Economic Performance Highlights
  • Accelerated growth since 2003, first three year
    expansion since the mid 70s. Key drivers
  • Monetary stimulus 2003
  • Trade led recovery in 2004
  • Shift to investment led expansion in 2005 and the
    NSE is no exception
  • Robust agricultural sector recovery in 2005
  • Other sectors tourism, communications (cellular
  • Robust performance in spite of adverse shocks
    oil prices, drought, aid shortfall

Economic Growth 1968-05
  • Inflation The CBK expects inflation to decline
    further due to the expected decline in food
    prices and the implementation of prudent monetary
    policy by the CBK. Currently Overall Average
    Annual 10.99 and Underlying Average Annual 4.24
  • Exchange Rates The Kenya shilling has been
    relatively stable, more recently, it has
    strengthened against the major currencies
  • Interest Rates
  • 91 day T Bill (6.511) and 182 day T Bill
  • The declining short term interest rates are a
    reflection of the liquidity in the money market
  • Continued high liquidity in the Kenyan economy
    will translate into sustained demand for listed
  • The Central Bank Rate (CBR) was raised by 25
    basis points to 10 in August.

Macroeconomic Indicators
Short Term Outlook
  • Robust growth expected to be sustained in 2006-7
    (5 7 range). Factors
  • Sustained agricultural recovery due to favourable
    weather and effect of reforms/rehabilitation
  • buoyant tourism sector and public infrastructure
  • buoyant global and regional growth outlook.
  • Risks
  • continued strengthening of the shilling will have
    adverse effects on export sectors (horticulture,
    EPZs, tourism)
  • Weak regional market due to electricity shortages
    in Uganda and Tanzania
  • Infrastructure capacity constraints railway,
    pipeline, electricity generation.

Standard Poors assigns Kenya a Credit Rating of
  • On 8 Sept 2006, Standard Poors assigned the
    Republic of Kenya a long term foreign currency
    sovereign credit rating of B with a stable
    outlook a long term local currency sovereign
    credit rating of BB- and a short term foreign and
    local currency rating as B
  • According to SP the ratings are supported the
    government's continued progress in implementing
    economic reform and by the strengthening of
    macroeconomic and political stability
  • SP said the landslide victory of President Mwai
    Kibaki in the 2002 general election is providing
    the basis for economic growth, raising confidence
    which is being reflected in declining domestic
    interest rates and strong inflows of remittances
    from the Kenyan diaspora
  • The partisan nature of Kenyan politics has not
    stopped the government making some economic

Standard Poors assigns Kenya a Credit Rating of
  • The ratings on Kenya are also constrained by a
    high level of infrastructure and development
    needs, SP said.
  • SP expects annual GDP growth to remain in the
    5.5 area over the medium term while a general
    government deficit of 3.3 of GDP in 2006 is
    expected to narrow to 2.4 of GDP by 2009.

Impact of the reforms on the performance of the
2nd Quarter 2006 Performance Overview Full Year
  • Market Indicators

Mkt. indicator 31 Dec. 2002 30 June 2006 Change
NSE 20 Share Index 1362.85 4,260.49 212.62
Mkt Cap. (Kshs./US Bn) 112.05/1.53 623.20/8.50 456.18
2nd Quarter 2006 Performance Overview Full Year
  • Market Indicators

Mkt. indicator 12 months ending 31 Dec. 2002 6 months ending 30 June 2006 Change
No. of Shares Traded (Mn) 148.836 382.756 157.17
Equity Turnover (Kshs./US Mn) 2921.18/39.85 22,740.60/310.24 678.47
No. of Deals 25,051 109,532 337.24
Bond Turnover (Kshs./US Mn) 33,629.4/458.79 18,913.75/258.03 -43.76
Equity Market Performance December 2003 12
September 2006
Total Capital Raised at the NSE in 2005
  • Equity (Rights Issues and Other Corporate
  • Kshs. 1.769 billion (US24.1 million)
  • Debt
  • 18 Government of Kenya treasury bonds with a face
    value of Kshs. 74.80 billion (US1.02 billion)
  • Corporate bonds with a face value of Kshs. 5.8
    billion (US 79 million)
  • Total Amount
  • Kshs. 82.369 billion (US1.12 billion) indicates
    increased absorption capacity of our market.

Total Capital Raised at the NSE in 2006
  • Equity (Rights Issues and Other Corporate
  • Kshs. 8.521 billion/US 116.25 million in IPOs
  • Debt
  • Government of Kenya treasury bonds with a face
    value of Kshs. 67.221 billion (US 917.06
  • Total Amount
  • Kshs. 75.742 billion (US 1.03 billion) indicates
    increased absorption capacity of our market.

New Issues
  • Kenya Electricity Generating Company (KenGen)
    Kenyas largest IPO to date. KenGen created out
    of the unbundling of the Kenya Power and Lighting
    Company (KPLC) produces approximately 80 of the
    electricity consumed in the country.
  • The Government of Kenya sold a 30 stake
  • The issue was oversubscribed by Kshs 18.2 billion
    (US 248.3 million) or 333, highlights the
    absorptive capacity of our markets. Listed on
    17th May 2006
  • Equity Bank Kenya On 7th August 2006, the
    introduction and trading of the entire issued
    (90,564,550) ord. shares of Equity Bank took
    place. It is one of Kenyas fastest growing
    domestically owned banks targeting small and
    micro entrepreneurs
  • Scangroup On 29th August 2006, Scangroup, the
    largest media and advertising company in East
    Africa, listed 43.4 of its share capital on the
    NSE. The IPO which raised Kshs. 724.0 million
    (US 9.88 million), was oversubscribed 6 times.

Transactions in the Pipeline
  • Privatization transactions in the pipeline
    include the sale to the public and subsequent
    listing of Government stakes in the following-
  • 40 of Kenya Re-insurance Corporation
  • 18.4 of Mumias Sugar Company (which is a listed
    company and Kenyas largest and most efficiently
    run sugar miller)
  • 34 of Telkom Kenya offloaded through the NSE
    after 26 has been sold to a strategic investor
  • Eveready East Africa Limited The application to
    list 30 of the ordinary shares of Eveready
    (East Africas largest battery manufacturer) in
    an IPO is under consideration by the Capital
    Markets Authority and the NSE.

Automation of the Trading System
  • The implementation of the Automated Trading
    System happened on Monday 11 September 2006
  • The ATS is sourced from Millennium Information
    Technologies (MIT) of Colombo, Sri Lanka, who are
    also the suppliers of the Central Depository
    System (CDS). MIT have also supplied similar
    solutions to the Colombo Stock Exchange and the
    Stock Exchange of Mauritius
  • The NSE trading hours have increased from 2 to 3
    hours (1000 am 100 pm). Besides trading
    equities, the ATS is also fully capable of
    trading immobilised corporate bonds and treasury
  • Opportunity to enhance revenue streams through
    information vending to our stakeholders.
  • The implementation of the ATS and achievement of
    T3, will bring us a step closer to meeting the
    Group of 30's (G30) standards on trading and
    settlement as adopted in 1989.