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Eromosele Abiodun writes that African financial markets will benefit from further regional integration of stock exchanges within the framework of regional economic communities, despite mounting challenges
The African securities market has witnessed considerable development since the early 1990s. Prior to 1989, there were only eight stock markets in the entire continent of which three were in North Africa and five in sub-Saharan Africa. Today, there are over 22 stock exchanges in the continent.
Alongside the rapid expansion of stock markets in the continent, there has also been a significant growth in market capitalisation and the number of listed companies. The market capitalisation for the entire continent was only about $569 billion in mid-2010.
However, the market capitalisation of the Johannesburg Stock Exchange (JSE) of South Africa, the biggest stock exchange in the continent, alone grew to $886 billion during the fourth quarter of 2007. The market capitalisation of Egyptian Stock Exchange, the second largest in the continent, and the Nigerian Stock Exchange, the third largest, was respectively $150 billion in February 2008 and $82 billion at the end of 2007. Together the three biggest stock exchanges in the continent had a combined market capitalisation of over $1.118 trillion in early 2008.
The combined number of listed companies for all stock exchanges in the continent grew from about 1,786 in 2005 to over 2,000 in 2008. At present, over 50 per cent of the 54 countries in the continent have formed securities exchanges. In an effort to promote regional cooperation, individual African securities exchanges established an African Securities Exchange Association (ASEA) in 1993. The ASEA was incorporated in Kenya in the same year.
The basic objective of the ASEA is to provide a formal framework for the mutual cooperation of stock exchanges in the African continent. Its functions include exchange of information and provision of material, human and other assistances in the development of the member exchanges.
In recent years, there have been calls by interest groups for business combination of West African stock exchanges in other to foster unity and a wider securities market to ensure speedy development of the region in line with the ASEA objectives.
Nigeria is however, leading the course. The Securities and Exchange Commission (SEC) is currently working with other regulators in the West African region to facilitate the formation of a single stock exchange in order to take care of the challenges of cross border listings on exchanges in the region.
A SEC source revealed that regulators in the region were currently looking at securities rules in various countries and harmonise them so as to ensure the success of the plan.
Example from Other Places
Meanwhile, other African stock exchanges are also striving to promote sub regional integration. For instance, eight French-speaking countries in West Africa that belong to the West African Monetary Union (WAMU) integrated their stock exchanges into a single BRVM regional stock exchange.
The BRVM was established in 1998 and is based in Abidjan, the capital of Cote d'Ivoire. The BRVM is the first regional stock exchange of its kind in the world.
WAMU is characterised by the recognition of a common monetary unit, the Franc of the African Financial Community (CFA F), which is issued by the Central Bank of West African States (BCEAO). WAMU comprises: Benin, Burkina Faso, Guinea Bissau, Cote d'Ivoire, Mali, Niger, Senegal and Togo. These countries have a combined population of over 74 million and a combined GDP of over $30 billion in 2010. The economic power house in the union is Cote d'Ivoire, with 40 per cent of the GDP coming for this country.
However, stakeholders have divided opinion on the possibility of a common stock exchange in West Africa, with some sighting lack of cooperation and bureaucratic bottlenecks in the region.
But a trader on the floor of the Nigerian Stock Exchange (NSE), Mr. Peter Aletor, said the prospects for the development of a common securities exchange in the West African region were encouraging.
"In particular, there has been persistent and high economic growth especially since 2001 in the region. We have also experienced a consistent commodity price boom, macroeconomic stability, reduction in political instability and internal strife. We have also had stable macroeconomic policies, and deepening regional economic integrations anchor growth and maturity of securities exchanges in the continent, "he said.
On his part, Managing Director and Chief Executive Officer of Emerging Capital Limited, Mr. Chidi Agbapu, believed the prospect of a single Exchange in West Africa was not possible in the foreseeable future.
He noted that in spite of their rapid developments, many stock exchanges in the region were still not mature.
He stated that except the three biggest stock exchanges, the NSE, Ghana Stock Exchange (GSE) and probably Sierra Leone, others were still very embryonic.
"Apart from Nigeria, most other exchanges are characterised by low market capitalisation, few listed companies, low liquidity, few stocks and information and disclosure deficiencies, among others.
"In Africa, the three biggest stock exchanges, South Africa, Egypt and Nigeria account for more than 90 per cent of the market capitalisation in the continent. The market capitalisation of Egypt’s Exchange was 100 per cent of GDP in 2008 while it is slightly less than 50 per cent of GDP in South Africa. In Nigeria it is about 30 per cent. "However, in the rest of the countries market capitalisation as the per cent of GDP is very low. Research showed that, market capitalisation for Africa in 2005 excluding South Africa and Zimbabwe was 27 per cent of GDP which contrasts with other emerging markets like Malaysia with a capitalisation ratio of about 161per cent," he said.
He added that liquidity as measured by turnover ratio was as low as 0.02 per cent in Sierra Leone in 2005 compared with about 29 per cent in Nigeria.
Low liquidity, he stated, means that it would be harder to support a local market with its own trading system, market analysis, brokers, and the like because the business volume would simply be too low.
"The major exception is the South African stock exchange, with market liquidity, measured by the annualised turnover as a percentage of market capitalisations, 61 per cent at the beginning of 2008," he said.
Agbapu disclosed that low market capitalisation and low liquidity were the main reasons why the global emerging market funds were ignoring West Africa’s listed securities.
"It is argued that a stock exchange must have $50 billion in market capitalisation and $10 billion in value traded to attract any interest from global emerging market funds (World Bank 2006). Only the stock Exchange in Nigerian meets these requirements, "he added.
"Return to portfolio investment in Africa is much higher than those in advanced countries. However, the perceived portfolio risks are higher in the continent. Economic theory indicates that investment decision makers prefer high-risk high-return bundles to low-risk, low-return ones, "he said.
He added that most decision makers, especially in the West do not seem to follow this basic economic principle when it comes to investment decisions in Africa.
"However, China does. That is why China’s portfolio as well as foreign direct investment in the continent has been increasing rapidly since the beginning of the 21st century," he said.
Despite the numerous challenges, experts believe English speaking West African countries have a lot to gain it they come together to form a single stock exchange.
A securities expert in Ghana, Mr. Kofi Adu Domfeh, believed the entire African financial markets would benefit from further regional integrations in stock exchanges.
According to him, "There are six Regional Economic Communities (RECs) in Africa at present. These are: Arab-Maghreb Union (AMU), Central African Economic and Monetary Union (CEMAC), Common Market of Eastern and Southern Africa (COMESA), Economic Community of West African States (ECOWAS), East African Communities, and Southern Africa Development Cooperation (SADC)."
The RECs, Domfeh stated, provided an ample opportunity for stock exchange integration and development in the continent.
"East African communities (Kenya, Uganda and Tanzania Exchanges) are talking of merging into a bigger East African Stock Exchange (EASE). Such an exchange would benefit the entire region including companies from countries such as Ethiopia, Rwanda and Burundi which do not have stock exchanges.
"However, there still remain serious constraints. Some of the salient constraints are disparities in levels of economic development, absence of uniform regulatory frameworks and accounting standards, lack of currency convertibility and restrictions on capital transfers, "he said.
Domfeh pointed out that regionalisation was considered to be inevitable for African stock markets as they struggle to consolidate in order to overcome low liquidity and to attract more foreign investment.
Need for Investment
Africa, Domfeh stated, was the least developed continent in the world stressing that the combined GDP of the continent in 2010 was $1.35 trillion ($2.57 trillion based on purchasing power parity (PPP)).
"This compares with the combined World GDP of $65.6 trillion (PPP) and that of China $6.99 trillion (PPP) in 2007. Although the continent has shown remarkable economic growth since 2001 with continental annual average economic growth in excess of 5 per cent for the past seven years, a lot needs to be done to lift the continent from lingering poverty, unemployment and overall economic underdevelopment.
"To sustain the current level of economic growth and encourage both domestic and foreign investment in the continent, Africa needs to rapidly expand, develop and modernise its financial markets. Evidence from recent empirical economic studies suggests that deeper, broader, and better functioning financial markets can stimulate economic growth, "he stated.
Domfeh argued that over the past two decades, stock market liquidity had been a catalyst for long-run growth in developing countries.
He further argued that without a liquid stock market, many profitable long-term investments would not be undertaken because savers would be reluctant to tie up their investments for long periods of time.
"In contrast, a liquid equity market allows savers to sell their shares easily, thereby permitting firms to raise equity capital on favourable terms. By facilitating longer-term, more profitable investments, a liquid market improves the allocation of capital and enhances prospects for long-term economic growth.
"Recent empirical studies found that countries with relatively liquid stock markets in 1976 grew much faster over the next 18 years than countries with illiquid markets, even after adjusting for differences in other factors that influence growth, such as education levels, inflation rates, and openness to trade," he said.
The studies, he stressed, also indicated, in promoting economic growth, a liquid stock market complemented a strong banking system, suggesting that banks and stock markets provided different bundles of financial services to the economy.
Financial markets, he further stated, were the life blood of the economy.
"In recognition of the importance of stock markets in economic development, several African countries launched stock exchanges during the past two decades. At present more than 50 per cent of the 54 African countries operate stock exchanges.
"Rapid expansion of stock exchanges in the continent contributed to economic development in various ways. These are, among others, facilitating the privatisation process, diversifying the financial services, facilitating long term capital mobilisation, provision of alternative investment opportunities, attracting foreign capital inflows and serving as a signal of overall macroeconomic performance.
"However, most African stocks exchanges are still at early stage of development and face several constraints. The main challenges are: political instability in some economies, high volatility in economic growth, macroeconomic uncertainty, liquidity constraints, limited domestic investor base, underdeveloped trading and settlement structures, and limited market information," he said.