Inside Kenya's KES40bn mortgage defaults & equity performance

Kenya is currently grappling with a record surge in mortgage defaults amounting to KES 40 billion, with a significant 88.4 per cent of mortgages linked to variable interest rates. This financial turmoil comes at a time when the country's equity markets are experiencing mixed results, with the NASI index declining by 1.3 per cent to KES 108.61 million, while the NSE-20 index showed a slight increase of 0.3 per cent to KES 1,702 million. Despite these challenges, foreign investors are pulling out of Kenyan stocks, resulting in a net outflow of KES 144.54 million. Caleb Mugendi, Investment Manager at Genghis Capital Asset Management, shed light on these concerning trends in a recent interview with CNBC Africa. One of the main factors contributing to the surge in mortgage defaults is the high interest rate environment in Kenya. The central bank rate has risen to 13 per cent, leading to an increase in loan rates across the board, including mortgages. With banks pricing their loans based on the central bank rate and adding a margin, mortgage holders are feeling the impact of these elevated interest rates. Despite the daunting KES 40 billion default figure, which represents around 14 per cent of the total mortgage loans in the country, it is important to note that the current non-performing loans rate stands at 16 per cent. Economic uncertainty, business environment challenges, and credit appraisal deterioration have all contributed to the rise in mortgage defaults, painting a bleak picture for borrowers in Kenya. On the equity front, ongoing protests and bearish sentiments have added to the market volatility. Foreign investors have been selling Kenyan stocks in recent weeks, with June likely to record a net outflow of foreign investments. The protests and the government's financial adjustments have created a risk-averse environment, leading to increased uncertainty among investors. The recent downgrade of the country's credit rating by Moody's to CAA1 with a negative outlook has further fueled investor concerns, resulting in a demand for higher premiums and a cautious approach towards investing in Kenyan assets. As Kenya navigates through these challenging times, it is essential for stakeholders in the financial market to closely monitor developments and adapt their strategies to mitigate risks. With significant events like the release of the KCB Group, PLC financial year 2023 results on the horizon, the coming weeks are crucial for Kenya's financial landscape, offering both opportunities and challenges for investors and market participants.