Effects of Oil Price Changes on Performance of the Manufacturing Segment of the Nairobi Securities Exchange

Abstract

Oil is a significant contributor to the economies, and its centrality in the Kenyan energy mix cannot be overlooked. Like other developing countries, Kenya relies heavily on fuel and as a source of energy. As such, the companies in the country are heavily affected by oil prices. This study aimed at investigating effects of oil price changes on performance of the manufacturing segment of the Nairobi Securities Exchange for a period of 5 years beginning 2012 to 2016. The manufacturing industry in Kenya consists of food and beverage industry, paper manufacturing, plastic manufacturing, metal and allied industry. The sub-sector in the NSE is composed of eight companies, all of which were studied in this research, and data obtained from the NSE, CBK. The sector is dominated by subsidiaries of multi-national corporations. It contributed approximately 13% of the Gross Domestic Product (GDP) in 2004. This topic has been previously been done by other scholars including Arouri et al., (2011), Ebrahim et al., (2014), Hamilton (2008) and Mork (1989) and others who came up with different conclusions. Several theories have also been propounded and they seem to agree to the significance of oil prices in the performance. Descriptive statistics, regression & correlation analysis, diagnostic tests and analysis of variance were employed in the analysis of data obtained analyzed with the help of statistical software EVIEWS. The variables, changes in oil prices, changes in exchange rates and changes in the interest rate were studied and its effects on financial performance as measured by stock prices of the companies as the independent variable. It was found that exchange rate is the most significant factor among the variables. Interest rates negatively affect the financial performance while interest rate also significantly increases financial performance of the companies. Of interest to note is the fact that oil prices have an insignificant negative impact on the financial performance. These variables cumulatively predict 71.2% of the stock prices. Therefore, the industry players should keep an eye on the interest rate and the exchange rates in their various economic decisions. The study further recommends that the security lending and borrowing should be introduced to enhance liquidity regarding long-term investment portfolio for manufacturing firms listed in the NSE. The major limitation of the study was the use of secondary data and the study suggests that the same is conducted using real-time data from the respective companies, and done in a longer period of time.