Stock exchanges vital to stimulate growth
Economists agree that vibrant financial markets play a critical role in channeling resources into productive investment and fostering growth.
It has been argued that African stock exchanges have become important sources of investment and are capable of promoting economic growth in the continent.
“Strengthening stock exchanges to support our capital-markets ecosystem will fuel economic growth,” once said Eddy Njoroge, chairman of the Nairobi Securities Exchange at the Africa Securities Exchanges Association (ASEA) conference last year in Kenya.
Zeona Jacobs, director marketing and corporate affairs at the Johannesburg Stock Exchange (JSE) told a Building African Financial Markets (BAMF) seminar in Johannesburg last year stock exchanges play a crucial role in the development of economies by allowing companies to raise capital through an efficient and transparent platform.
Opening the ASEA flagship conference last year, Kenyan Deputy President William Ruto said well-established capital markets can help African countries lessen vulnerability of their economies to external shocks, by locally marshalling through instruments such as bonds and reducing currency and duration mismatches.
“The exchanges have continued to foster regional integration by allowing cross border capital raising initiatives such as public offers, bond issues and cross listing of stocks,” added Ruto.
In an article ‘Harnessing African stock exchanges to promote growth’, Masimba Tafirenyika says that stock exchanges hold some advantages over private equity in raising investment capital.
“Companies can raise large sums of money to expand operations without getting expensive bank loans. Listed firms are required to publish regular reports. Stock exchanges give individuals a chance to invest directly in large corporations,” says Tafirenyika.
On many occasions the International Monetary Fund has concluded that if supported by the right policies and reforms, stock markets can help African companies expand operations, thereby contributing to economic growth.
Favourable environments to the growth of stock exchanges are beginning to take place in the continent.
Except some spots, political stability now exists in the continent.
“Political stability improved between 2001 and 2014 although several economies suffered at least temporarily, from political unrest….,”says the African Economic Outlook (AEC) 2015.
African countries need to harmonise their trading laws and accounting standards. A
proper marketing position for stock exchanges is vital in Africa.
A paper by the African Development Bank (AfDB), ‘Realising the potential of Africa’s Stock Exchanges,’ states that stock exchanges in Africa can provide centralised and organised platforms for the private and public sectors to raise capital to fund their future growth.
It added that liquid constraints, regulatory issues and information issues were some constraints to African exchanges’ growth.
At a session titled “Africa’s Stock Exchanges: The State of Play” at the 50th Annual Meetings of the African Development Bank in Abidjan, panelists argued that, African countries should support the integration of capital markets on the continent.
“A regional exchange will lead to more liquidity, the lifeblood of exchanges by making stocks available to a wider range of investors,” noted the panel.
It was observed that the small size of African stock markets and the absence of liquidity remains a major impediment for foreign investors interested in investing in the region.
The panel said transparent and accessible capital markets are a vital element of the financial sector.
“There is need to increase liquidity of the stock exchanges and develop more products.
We are convinced that if the stock exchanges remain fragmented, they cannot produce good results,” said Edoh Kossi Amenounve of the ASEA executive committee.
The chief executive officer of the Nigeria Sovereign Investment Authority, Uche Orji, said that the current sizes of the (different) stock markets do not reflect the size of the economy.
“We are missing opportunities to fund companies,” said Orji.
“As a vehicle for long-term investment finance and for diversification of funding sources,” argued the panel at the AfDB meetings, “capital markets strengthen the overall economy and render it more resilient in the face of economic shocks.”
The African Economic Outlook 2015 shows that Africa’s gross domestic product (GDP) growth is expected to strengthen to 4,5% in 2015 and 5% in 2016 after subdued expansion in 2013 (3,5%) and 2014 (3,9%).
“Africa will be soon closing in on the impressive growth levels seen before the 2008-09 global economic crisis,” noted AEO 2015.
As the western countries are struggling with a debt crisis and sluggish growth investors are eyeing Africa.
With Africa’s surging economy and positives growth in 2015, Sub-Saharan Africa’s GDP is expected to grow at 4.5%, making it the fastest-growing economic zone in the world, outpacing Asia’s regional average of 4.3% annual growth.
There are many obstacles that inhibit the growth of stock markets in Africa.
African stock markets are still small and often dominated by a handful of large corporations, except the Casablanca Stock Exchange (CSE) and the JSE, which are the continent’s biggest two in terms of the number of listed companies and market value.
It has been noted that effective financial markets are considered to be one of the most important factors for economic development and growth in developing nations.
According to the African Economic Outlook 2015, Africa’s monetary and exchange rate policies continued in 2014 to be geared toward maintaining or achieving price stability.
In countries where inflationary pressures have eased and exchange rates have remained relatively stable, policy interest rates have been reduced to stimulate growth.
It projected that inflation will remain at single-digit levels in 2015/16. But as deposit interest rates are lower than inflation, real interest rates are negative and provide little incentive to save.
“Sudan and Malawi faced particularly high inflation in 2014, around 38% in Sudan and around 24% in Malawi.
Their central banks have tightened policies and aim to stabilise their exchange rates and boost foreign exchange reserves,” stated the AEO 2015.
The (AEO) 2015 says that most African countries are labouring to improve monetary policy transmission mechanisms to combat inflation and stimulate their economies.
The African securities market has witnessed considerable development since the early 1990s.
There are currently 29 exchanges operating in Africa covering more than two thirds of African countries.
Before 1990 there were only eight stock markets in Africa.
Three were in the North Africa and five were in Southern Africa.
In an effort to promote regional cooperation, individual African securities exchanges established ASEA in 1993.
The main objective of 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.