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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
NAIROBI STOCK EXCHANGE
Table of Contents
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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 Exchange
Preamble
NAIROBI STOCK EXCHANGE
Preamble
Government of Kenya Reform AgendaEconomic 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 longawaited changes in the country's political, economic and social
sectors.

The new NARC government inherited a country beset by
economic, institutional and social failures.
Preamble
Government of Kenya Reform AgendaEconomic 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.
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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 (2003-2007)”(ERS).
Preamble
Government of Kenya Reform AgendaEconomic Recovery Strategy

The four ERS Objectives or pillars are:
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• To establish and sustain macro economic stability
• To strengthen governance
• To rehabilitate and expand infrastructure
• To invest in initiatives to build human capital.
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Reforms had to be formulated and implemented to achieve these
objectives;
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Investments had to be made and given time to mature;
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The economic and social order had to be reengineered.
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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
Stability
NAIROBI STOCK EXCHANGE
MACRO-ECONOMIC STABILITY
Financial and Fiscal Reforms
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%).
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In order to further lengthen the maturity profile of domestic debt, the
Government plans to issue a 15 year treasury bond.
MACRO-ECONOMIC STABILITY
Financial and Fiscal Reforms
Budgetary Reforms:
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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.
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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
market.
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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;
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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);
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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
MACRO-ECONOMIC STABILITY
Pension Sector Reforms
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 growth;
 The revised national accounts statistics show Kenya’s domestic savings
rate rising from 4.9 % of Gross Domestic Product in 2002 to 8.1 % in
2004;
 Spur the expansion of the country's capital markets through prudent
professional investment of scheme funds;
Pension Funds and the Capital Markets
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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 Taiwan;
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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 ‘developing’;
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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.
MACRO-ECONOMIC STABILITY
Pension Sector Reforms
Continued Pension Sector Reform:
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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 nonfunded; a typical pay–as-you–go scheme funded from recurrent
expenditure.
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Cost the government Kshs. 17.2 billion (US$ 234.65 million) annually or
Kshs. 1.43 billion (US$ 19.51 million) a month.
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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.
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When achieved this will unlock huge pools of investment funds that will
definitely boost the capital markets in Kenya and within the region.
MACRO-ECONOMIC STABILITY
Pension Sector Reforms
Continued Pension Sector Reform:
 Lock-in of employer contributions for employees changing employment
before attaining retirement age;
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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
issue.
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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;
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We expect to see increased participation of pension schemes on the
NSE.
MACRO-ECONOMIC STABILITY
Institutional Reforms
Government Divestiture
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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 NSE;
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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;
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The government has also created the Bank Privatization Unit to coordinate ownership restructuring of the remaining state-owned financial
institutions i.e. Kenya Commercial Bank, National Bank of Kenya,
Consolidated Bank of Kenya.
MACRO-ECONOMIC STABILITY
Trade and Industry
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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
Kenya’s 175 local authorities.
MACRO-ECONOMIC STABILITY
Regional Trade
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Regional Trade: East African Community (EAC) Customs Union which
unified and harmonized tariffs was completed in 2005 – a firm
foundation for a common market;
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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).
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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 region;
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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 (USE);
Reforms to Strengthen
Governance
NAIROBI STOCK EXCHANGE
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.
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Enactment of the Financial Management Act 2005: With the
objective of enhancing transparency and accountability of the
management of the public finances.
Governance
Ministerial Rationalization
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Ministerial Rationalization: Ministries functions and structures have been
reviewed with non-core activities identified for privatization.
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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.
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Policy has been developed to support e-government.
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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 Parks;
– Distribution: CDMA, WiFi, Wimax, IPTV etc.;
– Other Support Services. i.e. equipment assembly.
Governance
Public Sector Reforms
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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;
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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);
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The objective of reducing overall public expenditure has yet to be
achieved.
Rehabilitation and
Expansion of Infrastructure
NAIROBI STOCK EXCHANGE
Rehabilitating Infrastructure
Energy Sector
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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 agencies.
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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;
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Raise the rate of new connections from 70,000 realized in 2005 to
150,000 annually.
Rehabilitating Infrastructure
Transport Sector
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Transport: Public transport was reorganized in 2004 leading to increased
investment in the area and improved safety conditions;
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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.
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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
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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);
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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 capital.
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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
NAIROBI STOCK EXCHANGE
Social Reforms
Budgetary allocation to the social sectors continues to rise consistent with
government’s commitment to invest in initiatives that will build human capital
and reduce poverty.
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Education; Free primary education was introduced in 2003 and grants for
infrastructure development for primary schools introduced.
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In 2006/2007 budget 27% of total expenditure :Kshs 99 billion (US$ 1.35
billion)) was allocated to education;
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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
NAIROBI STOCK EXCHANGE
GDP Growth 2000-05
7
6
5
4
3
2
1
0
2000
2001
2002
2003
2004
2005
Economic Performance Highlights
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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 phones)
Robust performance in spite of adverse shocks: oil prices, drought, aid
shortfall
Economic Growth 1968-05
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
• 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 (7.533%);
• 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 securities.
• The Central Bank Rate (CBR) was raised by 25 basis points to 10% in
August.
Macroeconomic Indicators
Short Term Outlook

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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 spending;
 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 B+

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 S&P the ratings are supported the government's continued
progress in implementing economic reform and by the strengthening of
macroeconomic and political stability;
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S&P 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 reforms.
Standard & Poors assigns Kenya a Credit
Rating of B+

The ratings on Kenya are also constrained by a high level of
infrastructure and development needs, S&P said.

S&P 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 NSE
NAIROBI STOCK EXCHANGE
2nd Quarter 2006 Performance Overview & Full Year
2002
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)
623.20/8.50
456.18
112.05/1.53
2nd Quarter 2006 Performance Overview & Full Year
2002
Market Indicators:
Mkt. indicator
12 months
ending 31 Dec.
2002
6 months
30 June 2006
% Change
No. of Shares
(Mn)
148.836
382.756
157.17
Equity Turnover
(Kshs./US$ Mn)
2921.18/39.85
22,740.60/310.2
678.47
No. of Deals
25,051
109,532
337.24
Bond Turnover
(Kshs./US$ Mn)
33,629.4/458.79 18,913.75/258.0
-43.76
12 Sep -06
31 July - 06
31 May -06
30-Dec-05
30-Oct-05
29 Jul -05
15 Jul-05
1 Jul-05
May- 05
Mar-05
Jan-05
Nov-04
24-Sep-04
Aug-04
Jun-04
April-04
Feb-04
Dec-03
Index
5000
4500
3500
3000
500
2500
400
2000
300
500
0
Mkt Cap.( Kshs Bn)
Equity Market Performance
December 2003 – 12 September 2006
800
700
4000
600
1500
200
1000
100
0
Month
Index
Mkt. Cap.
Total Capital Raised at the NSE in 2005
Equity (Rights Issues and Other Corporate Actions)

Kshs. 1.769 billion (US$24.1 million)
Debt

18 Government of Kenya treasury bonds with a face value of Kshs. 74.80
billion (US$1.02 billion);

Corporate bonds with a face value of Kshs. 5.8 billion (US$ 79 million);
Total Amount

Kshs. 82.369 billion (US$1.12 billion) indicates increased absorption
capacity of our market.
Total Capital Raised at the NSE in 2006
Equity (Rights Issues and Other Corporate Actions)

Kshs. 8.521 billion/US$ 116.25 million in IPOs
Debt

Government of Kenya treasury bonds with a face value of Kshs. 67.221
billion (US$ 917.06 million);
Total Amount

Kshs. 75.742 billion (US$ 1.03 billion) indicates increased absorption
capacity of our market.
New Issues

Kenya Electricity Generating Company (KenGen) Kenya’s
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 Kenya’s 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 Kenya’s 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 Africa’s largest battery manufacturer) in an IPO
is under consideration by the Capital Markets Authority and the NSE.
Automation of the Trading
System
NAIROBI STOCK EXCHANGE
Automation

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 (10:00 am –
1:00 pm). Besides trading equities, the ATS is also fully capable of
trading immobilised corporate bonds and treasury bonds.

Opportunity to enhance revenue streams through information vending
to our stakeholders.

The implementation of the ATS and achievement of T+3, will bring us a
step closer to meeting the Group of 30's (G30) standards on trading and
settlement as adopted in 1989.
End
NAIROBI STOCK EXCHANGE