The impact of the AGOA legislations on the market returns in Kenya.

• Author: Nezerwe, Yvan

1. INTRODUCTION

   This paper examines whether the African Growth Opportunity Act (AGOA) legislation has had any impact on the market returns in Kenya.

   The AGOA is an American legislation that provided duty-free access for a large number of African products into the US market. Many free trade agreements have been signed in the last two decades. Free trade agreements are generally signed to remove tariffs, quotas and any other trade barriers. However, economists agree that free trade agreements bring freer trade, not free trade. There are always some trade barriers or restrictions that are not removed by free trade agreements.

   Kenya is a regional hub for finance and trade in East Africa. It was one of the first African countries eligible for the trade benefits of AGOA in 2000. Since becoming AGOA eligible, Kenya has steadily increased its exports to the US market. Historical data shows that Kenyan exports to the US have more than doubled in the first year of AGOA. Textile, agricultural and electronic products are the biggest Kenyan exports to the US.

   Kenya has been politically stable in general but its economic growth has been hampered by corruption. The Nairobi Stock Exchange (NSE) is one of the biggest stock exchanges in Africa. Many companies listed on the NSE export their products to the United States under the AGOA agreement.

   These Kenyan companies' daily returns formed the data that we used in our standard event methodology. The event methodology has widely been used in the field of Finance and focuses on the movements of the stock prices over a period of time. I calculated the abnormal returns of stocks on a specific event in assessing the potential impact of the AGOA. The dates of the treaty signatures are the events (May 18th 2000, August 6th 2002, July 12th 2004 and December 20th 2006).

   The abnormal returns on a specific date or event reflect the investors' expectations on the future performance of the stock. My hypothesis is that the returns would get a bump because of the AGOA agreement. I anticipate abnormal returns because of the benefit of accessing the huge American market duty-free.

   The results of the study do not support the hypothesis. The signature of AGOA I is the only event that showed abnormal returns. The rest of this paper is divided as follows: Section 2 and 3 describe the AGOA legislations and the Nairobi Stock Exchange. In Section 4 discusses the available literature on the research topic. Section 5 describes the methodology used in the study. Section 6 discusses the results and Section 7 concludes the study.

2. AGOA LEGISLATIONS

   The AGOA legislation (AGOA I) was approved by the US Congress in May 2000 and signed into law by the US President Bill Clinton. At the time, there were 34 eligible African countries. The eligible products would have to be made in the eligible countries. The less developed countries (Per capita GNP under $1500), under a special treatment, can export duty free apparel from fabric made anywhere in the world.

   The US President Georges Bush signed the AGOA amendments thereafter. The AGOA II expanded preferential access for imports from eligible African countries and also gave more powers to the US Congress in approving the eligible products. New products such as knit-to-shape products were made eligible under the AGOA II. At the request of African countries, Namibia and Botswana were now considered less developed countries. The most important AGOA II amendment was that it doubled the volume cap on duty free treatment for apparel products made in...