We live in an interconnected world thanks to international trade. This interconnectedness has always guaranteed free movement of capital and resources thereby meeting the different needs of the world’s population. International trade heavily relies on the concept of free trade and stability. As such, any instance of political instability as well as unfavourable regulations usually results in capital flight. Previously, markets have always reacted to geopolitical events and this is set to continue since political stability and free markets lay the backbone of international trade. We, therefore, focus on what happens when there is uncertainty in the financial markets.
In 2017, after the nullification of Kenya’s presidential polls, the stock exchange shed more than 10% of its previous trading, prompting a halt in trading. This was majorly driven by sell-off in the listed blue-chips. Bearing in mind that our market is dominated by foreign investors, any uncertainty would result in a sell-off. This was replicated in the 2020-2021 period when most investors sought for safeguards against the coronavirus pandemic. Data from the said period indicated that foreigners were net sellers which ended up boosting local investor’s holdings in certain companies such as KCB.
Another negative effect of uncertainty in any country would result in their currency depreciating against the dollar. Since international trade is settled in dollars, any uncertainty forces sell-offs. With this huge sell-off by foreign investors, there is increased demand for foreign currency which puts pressure on our local currency. As such, it will cost you more to buy the dollar due to increased demand. This is the same effect the Russian Ruble is going through as investors and companies dump their securities.
Any country suffering from internal issues is normally isolated from the global system with ramifications such as sanctions and being shut from the global payment system. Trade sanctions might impede free flow of capital and goods as foreign companies are not allowed to trade with the sanctioned country. A case example is Zimbabwe who have borne sanctions for the longest time after the government’s infringement on property rights. Another case example is Russia who have been locked out of the global payment and settlement system (SWIFT) for invading a sovereign state.
Any uncertainty be it global or local, shall automatically result in negative effects towards the local economy. These effects often lead to isolation as capital always goes where there exists security and attractive returns.