How new budget cuts impact Kenya’s financial markets

Kenya's financial markets are feeling the tremors as the government implements a series of budget cuts to reduce the public wage bill. The move is anticipated to have a significant impact on the country's economy, particularly on interest rates and investor sentiment. With the scrapping of the finance bill that was expected to raise additional revenue, the country now faces a budget deficit of around 169 billion shillings, leading to increased borrowing and a surge in the already daunting debt levels. Caleb Mugendi, Investment Manager at Genghis Capital Asset Management, shed light on the potential ramifications of these measures in a recent interview with CNBC Africa. Mugendi highlighted that the scrapped finance bill, which was set to generate 346 billion shillings, will necessitate alternative funding sources for the country's budget, resulting in a trimmed budget and additional borrowings. This will not only escalate Kenya's debt burden, currently standing at over 10 trillion shillings, but also push interest rates higher as investors seek higher returns to compensate for the increased risks. The effects of these developments are already visible in the market, with the NSE and NSE20 indices showing underperformance. Several sectors, such as telecommunications and banking, have been particularly hard-hit by the dwindling investor confidence and increased foreign exits from the market. The looming budget cuts and uncertain financing plans have led investors to reassess their exposure to these sectors, resulting in a downward drag on market performance. The ongoing geopolitical tensions and budgetary concerns have further exacerbated the situation, prompting a cautious approach from market participants. Moreover, the high inflationary pressures in the country are adding to the market's woes, with investor sentiment likely to be further swayed by the prevailing economic uncertainties. The recent contraction in the standard bank's purchasing managers index and the tepid GDP growth in the first quarter have already set a somber tone for the market outlook. Businesses and investors are expected to tread carefully in the coming months, anticipating more challenges and headwinds on the horizon. As Kenya grapples with the aftermath of the budget cuts and the resultant market turbulence, all eyes are on how the government will navigate the path to economic recovery and stability. The resilience of the financial markets in the face of these challenges will test the country's economic prowess and its ability to weather the storm.