Will A Regional Stock Exchange Serve Africa’s Interest?
Why should we be talking of creating a Pan-African stock exchange in Johannesburg while several of the biggest South African domiciled companies are themselves carrying their primary listings to the London Stock Exchange? Is it feasible to think that African stock markets will get bigger in terms of the number of listings and capitalisation by simply lumping them together on one exchange? Will a regional exchange really be of much help to investors domiciled in different countries on the continent or will it simply facilitate the big fund managers domiciled outside the continent and in South Africa to take over and control African listed companies on a regional bourse? What are the implications of a regional bourse for human capacity building in the financial markets in the various African countries? Is this project just not going to end as another huge white washed tomb that Africa is an expert in creating?
These are nagging questions that need careful reflection. For some of us, the idea of a regional bourse in Johannesburg does not seem to be the panacea to the small and illiquid nature of the stock markets we find on the continent. The market in South Africa is pretty much developed because of relative economic stability, a conducive regulatory environment and a well developed institutional fund management industry that provides strong incentives for investors to not only invest in the economy but to participate in the stock market. Any attempts to develop the markets in Africa should focus on these and provide incentives for businesses to list.
One compelling reason why a regional bourse will be defeatist is that it is likely to shrink the total number of listed companies on the continent as a whole. This is simply because in almost all the markets, the prime listed companies are the multinational corporations. A regional bourse will simply create a nice excuse for these multinationals to list as single regional entities in South Africa instead of as separate listings reflecting individual country operations in Ghana, Zambia, Tanzania, Nigeria etc. Thus a regional bourse will not necessarily result in increased listings. In fact, it potentially will reduce the number of listings as a whole and thereby narrow the universe of choice available to investors. We are already seeing a strong trend towards regionalisation of the operations of many multinationals in Africa which are being run ultimately from South Africa. On this basis it is quite unlikely that African markets as a whole will be bigger by simply creating one bourse in South Africa.
The world's first regional bourse, the stock exchange in Cote D'Ivoire that represents eight francophone West African countries has actually made very little impact on the individual economies they are supposed to represent and it suffers from the same problems other markets have on the continent- low liquidity and small capitalisation. In fact the markets in Ghana and Nigeria- also in West Africa are bigger in terms of capitalisation and listings than the regional bourse.
Rather, to increase the number of listings in Africa, it is important that governments stop paying lip service to the development of the capital markets because of parochial interests. They need to strongly link their divestiture and privatization programmes to the development of their respective stock exchanges and also provide strong tax incentives to listed companies to attract others to list. It is quite sad that a number of governments including the Government of Ghana have failed to take advantage of the divestiture programme to develop the markets. For instance, just recently some of the best potential candidates for the stock exchange such as Barclays Bank Ghana and Coca Cola Ghana were offloaded outside the stock exchange mechanism. The lame excuse governments tend to give is that corporate law requires they offer their holdings first to existing shareholders who do not seem to be interested in listing their companies on a stock exchange. However, it is also true that governments are powerful enough to provide other strong incentives outside corporate law to get such companies to list. Some may even suggest that regulatory changes can be introduced to ensure that the public is given the opportunity to own a determined minimum percentage of businesses that governments divest and this could create the impetus for listings to increase.
Furthermore, the mistake many African countries have made is the overriding emphasis placed on equity listings at the expense of debt listings on the various African markets. It is overdue that efforts are made to issue and list both corporate and government debt instruments on the various markets. After all, debt is already a more popular investment instrument in many African countries so success is a possibility if more attention is paid to debt listings.
The regionalisation of Africa's stock markets will not solve the liquidity problems either because it does not address the pertinent barriers that have underpinned the problem. Low liquidity is largely due to low floats, limitations put on foreign participation and small capitalisation of individual listed companies. Small local institutional participation in the markets due to poor regulatory and policy environments that constrain the creation of vibrant fund management industries in African countries is another factor behind the high liquidity risk on the continent. In addition exchange control barriers have made it difficult and costly for foreign participation. Regionalisation will of course not solve the problem of small floats and small capitalisations- how will it?
Regionalisation even if successful in buoying liquidity will only likely happen because of increased participation of the big fund managers in South Africa and outside the continent because of the visibility a regional bourse will create but not because it will necessarily encourage increased investments from other parts of the continent. There is actually the possibility that it will only serve to further discourage savings and investment culture in individual African countries because of exchange control barriers, the 'psychological' distance of the bourse far away in Johannesburg and also because it has implications for foreign exchange risk. It is important that we measure the success of our markets in terms of the role they play in the national economy and how they have encouraged domestic capital mobilisation and investment and not in terms of only bringing in foreign investment. Regionalising the stock markets in Africa is also likely to delay if not totally halt the impetus to create the right regulatory framework in individual countries on the continent to encourage the emergence of institutional fund management capabilities that will create new investment products for households.
Resolving the liquidity problems in African markets thus rather requires a cocktail of measures including breaking down limitations on foreign participation, encouraging the creation of collective investment schemes such us mutual funds and private pension/provident funds, increasing floats, reducing exchange controls, good political governance and better economic management that will increase wealth and encourage household investments. Educational campaigns and relevant advertising campaigns that will make people aware of the opportunities available in the markets must also be pursued.
Another reason why the prospect of a regional exchange is not attractive is that it will retard the nurturing and development of local professionals in the industry in individual countries as most of the business shifts to the brokerage and fund management houses in South Africa. Small brokerage firms in individual countries are also likely to wind up because of low business volume rather than grow and provide career and employment opportunities for people in different countries. The combined effect is that individual economies may lose tax revenues. Also, the balance and integration that needs to develop between the money and capital markets in the individual countries may be delayed and this could expose these economies to even higher financing risk than they face currently.
African stock markets as they exist today have bright prospects provided all stakeholders are committed to solving the pertinent problems that are hindering their growth but regionalisation will solve few of the problems if any. Let the debate continue….. LONG LIVE AFRICA
The author is an investment professional with Databank Group but his views do not necessarily represent that of the company.