Stock Exchange in Africa: Prospects and Challenges
Dr. Wolassa L. Kumo
September 25, 2008
1. Introduction
Africa is the least developed continent in the world. The combined GDP of the continent in 2007 was US$1.15 trillion (US $2.57 trillion based on Purchasing Power Parity (PPP)). This compares with the combined World GDP of US$65.6 trillion (PPP) and that of China US$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% for the past 7 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 (Ndikumana, 2001).
According to Levine (1997), over the past two decades, stock market liquidity has been a catalyst for long-run growth in developing countries. He further argues 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. The studies also indicate that, in promoting economic growth, a liquid stock market complements a strong banking system, suggesting that banks and stock markets provide different bundles of financial services to the economy (Levine, 1997). Financial markets are, therefore, 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% 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.
The rest of the article is organised as follows: section 2 presents the development of stock exchange in the continent. Section 3 reviews prospects and challenges of stock exchanges in Africa while section 4 concludes.
2. The Development of Stock Exchanges in Africa
There has been a considerable development in the African securities markets since the early 1990s. Prior to 1989, there were only 8 stock markets in the entire continent of which 3 were in North Africa and 5 in sub-Saharan Africa. Today there are over 22 stock exchanges in the continent.
Along side 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 US$569 billion in mid 2005. However, the market capitalisation of JSE of South Africa, the biggest stock exchange in the continent, alone grew to US$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 US$150 billion in February 2008 and US$82 billion at the end of 2007. Together the three biggest stock exchanges in the continent have a combined market capitalisation of over US$1.118 trillion in early 2008.
The combined number of listed companies for all stock exchanges in the continent grew from about 1786 in 2005 to over 2000 in 2008.
At present, over 50% 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.
Currently, there are 19 member stock exchanges of ASEA belonging to 26 countries. These are:
1)Botswana (BSE)
2)Egypt (EGE-based in Alexandra and Cairo )
3)Ghana (Ghana SE)
4)BRVM countries (BRVM) (Regional SE of 8 countries)
5)Kenya (Nairobi SE)
6)Malawi (Malawi SE)
7)Mauritius (SE of Mauritius)
8)Morocco (Casablanca SE)
9)Mozambique (Mozambique SE)
10)Namibia (Namibia SE)
11)Nigeria (Nigerian SE)
12)South Africa (JSE Ltd and BESA)
13)Swaziland (Swaziland SE)
14)Libya (Libya Stock Market)
15)Tanzania (Dar-Es Salaam SE)
16)Uganda (Uganda SE)
17)Zambia (Lusaka SE)
18)Zimbabwe (Zimbabwe SE)
19)Sudan (Khartoum SE)
Some stock exchanges in the continent are not members of the ASEA. These include countries such as Tunisia and Gabon with recent stock exchange start ups.
African stock exchanges are also striving to promote sub regional integration. For instance, 8 countries in West African sub region which 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 Côte d'Ivoire. The BRVM is the first regional stock exchange of its kind in the world.
The West African Monetary Union 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, Côte d'Ivoire, Mali, Niger, Senegal and Togo. These countries have a combined population of over 74 million and a combined GDP of over US$26 billion in 2002. The economic power house in the union is Côte d'Ivoire, with 40% of the GDP coming for this country.
3. Prospects and Challenges
3.1 Prospects
The prospects for the development of securities exchanges in the continent are encouraging. In particular, persistent and high economic growth especially since 2001, the commodity price boom, macroeconomic stability, reduction in political instability and internal strife, conducive macroeconomic policies, and deepening regional economic integrations anchor growth and maturity of securities exchanges in the continent.
African financial markets will benefit from further regional integrations in stock exchanges with in the framework of regional economic communities. There are 6 Regional Economic Communities (RECs) in Africa at present. These are:
(1) Arab-Maghreb Union (AMU)
(2) Central African Economic and Monetary Union (CEMAC)
(3) Common Market of Eastern and Southern Africa (COMESA)
(4) Economic Community of West African States (ECOWAS),
(5) East African Communities, and
(6) Southern Africa Development Cooperation (SADC)
The RECs provide 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. 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.
Regionalisation is 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.
3.2 Challenges
In spite of their rapid developments, many stock exchanges in the continent are still not mature. Except the three biggest stock exchanges in the continent, i.e. South Africa, Egypt and Nigeria, most exchanges are characterised by low market capitalisation, few listed companies, low liquidity, few stocks and information and disclosure deficiencies, among others.
The three biggest stock exchanges account for more than 90% of the market capitalisation in the continent. The market capitalisation is 100% of GDP in Egypt in 2008 while it is slightly less than 50% of GDP in South Africa. However, in the rest of the countries market capitalisation as the percent of GDP is very low. According to Yartey and Adjasi (2007), market capitalisation for Africa in 2005 excluding South Africa and Zimbabwe was 27% of GDP which contrasts with other emerging markets like Malaysia with a capitalization ratio of about 161percent.
In addition to this, liquidity as measured by the turnover ratio is as low as 0.02 percent in Swaziland in 2005 compared with about 29 percent in Mexico. Low liquidity means that it will 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 (Yartey and Adjasi,2007). The major exception is the South African stock exchange, JSE, with market liquidity, measured by the annualised turnover as a percentage of market capitalisations, 61% at the beginning of 2008.
The low market capitalisation and low liquidity are the main reasons why the global emerging market funds are ignoring Africa´s listed securities. It is argued that a stock exchange must have US$50 billion in market capitalisation and US$10 billion in value traded to attract any interest from global emerging market funds (World bank 2006). Only the three big stock exchanges in the continent hit these requirements.
Despite the problems of small size and low liquidity, African stock markets continue to perform remarkably well in terms of return on investment. The Ghana Stock Exchange was as the world´s best-performing market at the end of 2004 with a year return of 144 percent in US dollar terms compared with 30 percent return by Morgan Stanley Capital International Global Index while within the continent itself five other bourses, i.e. Uganda, Kenya, Egypt, Mauritius and Nigeria apart from Ghana, were amongst the best performers in the year (Yartey and Adjasi,2007).
4. Conclusion
Since the 1990s capital markets grew rapidly in Africa. There were only 8 stock exchanges in the entire continent before 1989. At present, over 50% of the 54 countries in the continent formed stock exchanges. Africa also formed the first regional stock exchange of its kind in the world, the BRVM of WAMU.
Prospects for the continents´ securities exchanges look good. Persistent and high economic growth especially since 2001, the commodity price boom, macroeconomic stability, reduction in political instability and internal strife, conducive macroeconomic policies, and deepening regional economic integrations anchor growth and maturity of securities exchanges in the continent.
However, most securities exchanges in the continent still face serious challenges. Among others these include, low market capitalisation, few listed companies, low liquidity, few stocks and information and disclosure deficiencies.
Against this backdrop, most African securities exchanges are the world´s best performers in terms of return to investment. 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. However, 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.
In addition to this, the emerging market funds continue to ignore African listed securities exchange due to their smaller market size and lower liquidity. Like other investment decisions makers in the West, the decisions of these funds to shun Africa are not based on sound economic principles. The criteria of US$50 and US$10 billion market capitalisation and value treaded respectively sounds very stringent. Many stock exchanges may not be able to hit these thresholds in the near future. While African securities exchanges are required to enhance their regional integration to alleviate their size and liquidity problems, investors from the west are required to tone down their requirements to invest in the continent.
Africa is a land of opportunity in the 21st century. Investors in the West should not be bogged down by the continents´ long dark history. Africa is shining at present. They should be able to seize this opportunity.
At the bilateral and multilateral levels, Africa does not need any more pity. What Africa needs is massive injection of portfolio and foreign direct investment. The aid business failed to lift Africa from poverty during the past 50 years. The three important things Africa need at present are investment, investment and investment. Invest in African stocks, invest in African real sectors and make a difference.
References
Levine, R. 1997. Stock markets, economic development and capital control liberalisation. Perspective, Investment Company Institute, Occasional papers, Vol 3. No.5
Ndikumana, L. 2001. Financial market and economic development in Africa. Political Economy Research Institute, University of Massachusetts, Working paper series, No. 17.
Yartey, CA. and Adjasi, CK. 2007. Stock Market development in sub-Saharan Africa. Critical issues and challenges. IMF Working paper. No. WP/07/209.
World Bank 2006. Private Sector Development Blog. A Market Approach to
Development thinking
http://psdblog.worldbank.org/psdblog/2006/12/why_doesnt_afri.html (Retrieved on 18/09/2008).
Africa is the least developed continent in the world. The combined GDP of the continent in 2007 was US$1.15 trillion (US $2.57 trillion based on Purchasing Power Parity (PPP)). This compares with the combined World GDP of US$65.6 trillion (PPP) and that of China US$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% for the past 7 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 (Ndikumana, 2001).
According to Levine (1997), over the past two decades, stock market liquidity has been a catalyst for long-run growth in developing countries. He further argues 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. The studies also indicate that, in promoting economic growth, a liquid stock market complements a strong banking system, suggesting that banks and stock markets provide different bundles of financial services to the economy (Levine, 1997). Financial markets are, therefore, 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% 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.
The rest of the article is organised as follows: section 2 presents the development of stock exchange in the continent. Section 3 reviews prospects and challenges of stock exchanges in Africa while section 4 concludes.
2. The Development of Stock Exchanges in Africa
There has been a considerable development in the African securities markets since the early 1990s. Prior to 1989, there were only 8 stock markets in the entire continent of which 3 were in North Africa and 5 in sub-Saharan Africa. Today there are over 22 stock exchanges in the continent.
Along side 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 US$569 billion in mid 2005. However, the market capitalisation of JSE of South Africa, the biggest stock exchange in the continent, alone grew to US$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 US$150 billion in February 2008 and US$82 billion at the end of 2007. Together the three biggest stock exchanges in the continent have a combined market capitalisation of over US$1.118 trillion in early 2008.
The combined number of listed companies for all stock exchanges in the continent grew from about 1786 in 2005 to over 2000 in 2008.
At present, over 50% 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.
Currently, there are 19 member stock exchanges of ASEA belonging to 26 countries. These are:
1)Botswana (BSE)
2)Egypt (EGE-based in Alexandra and Cairo )
3)Ghana (Ghana SE)
4)BRVM countries (BRVM) (Regional SE of 8 countries)
5)Kenya (Nairobi SE)
6)Malawi (Malawi SE)
7)Mauritius (SE of Mauritius)
8)Morocco (Casablanca SE)
9)Mozambique (Mozambique SE)
10)Namibia (Namibia SE)
11)Nigeria (Nigerian SE)
12)South Africa (JSE Ltd and BESA)
13)Swaziland (Swaziland SE)
14)Libya (Libya Stock Market)
15)Tanzania (Dar-Es Salaam SE)
16)Uganda (Uganda SE)
17)Zambia (Lusaka SE)
18)Zimbabwe (Zimbabwe SE)
19)Sudan (Khartoum SE)
Some stock exchanges in the continent are not members of the ASEA. These include countries such as Tunisia and Gabon with recent stock exchange start ups.
African stock exchanges are also striving to promote sub regional integration. For instance, 8 countries in West African sub region which 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 Côte d'Ivoire. The BRVM is the first regional stock exchange of its kind in the world.
The West African Monetary Union 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, Côte d'Ivoire, Mali, Niger, Senegal and Togo. These countries have a combined population of over 74 million and a combined GDP of over US$26 billion in 2002. The economic power house in the union is Côte d'Ivoire, with 40% of the GDP coming for this country.
3. Prospects and Challenges
3.1 Prospects
The prospects for the development of securities exchanges in the continent are encouraging. In particular, persistent and high economic growth especially since 2001, the commodity price boom, macroeconomic stability, reduction in political instability and internal strife, conducive macroeconomic policies, and deepening regional economic integrations anchor growth and maturity of securities exchanges in the continent.
African financial markets will benefit from further regional integrations in stock exchanges with in the framework of regional economic communities. There are 6 Regional Economic Communities (RECs) in Africa at present. These are:
(1) Arab-Maghreb Union (AMU)
(2) Central African Economic and Monetary Union (CEMAC)
(3) Common Market of Eastern and Southern Africa (COMESA)
(4) Economic Community of West African States (ECOWAS),
(5) East African Communities, and
(6) Southern Africa Development Cooperation (SADC)
The RECs provide 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. 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.
Regionalisation is 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.
3.2 Challenges
In spite of their rapid developments, many stock exchanges in the continent are still not mature. Except the three biggest stock exchanges in the continent, i.e. South Africa, Egypt and Nigeria, most exchanges are characterised by low market capitalisation, few listed companies, low liquidity, few stocks and information and disclosure deficiencies, among others.
The three biggest stock exchanges account for more than 90% of the market capitalisation in the continent. The market capitalisation is 100% of GDP in Egypt in 2008 while it is slightly less than 50% of GDP in South Africa. However, in the rest of the countries market capitalisation as the percent of GDP is very low. According to Yartey and Adjasi (2007), market capitalisation for Africa in 2005 excluding South Africa and Zimbabwe was 27% of GDP which contrasts with other emerging markets like Malaysia with a capitalization ratio of about 161percent.
In addition to this, liquidity as measured by the turnover ratio is as low as 0.02 percent in Swaziland in 2005 compared with about 29 percent in Mexico. Low liquidity means that it will 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 (Yartey and Adjasi,2007). The major exception is the South African stock exchange, JSE, with market liquidity, measured by the annualised turnover as a percentage of market capitalisations, 61% at the beginning of 2008.
The low market capitalisation and low liquidity are the main reasons why the global emerging market funds are ignoring Africa´s listed securities. It is argued that a stock exchange must have US$50 billion in market capitalisation and US$10 billion in value traded to attract any interest from global emerging market funds (World bank 2006). Only the three big stock exchanges in the continent hit these requirements.
Despite the problems of small size and low liquidity, African stock markets continue to perform remarkably well in terms of return on investment. The Ghana Stock Exchange was as the world´s best-performing market at the end of 2004 with a year return of 144 percent in US dollar terms compared with 30 percent return by Morgan Stanley Capital International Global Index while within the continent itself five other bourses, i.e. Uganda, Kenya, Egypt, Mauritius and Nigeria apart from Ghana, were amongst the best performers in the year (Yartey and Adjasi,2007).
4. Conclusion
Since the 1990s capital markets grew rapidly in Africa. There were only 8 stock exchanges in the entire continent before 1989. At present, over 50% of the 54 countries in the continent formed stock exchanges. Africa also formed the first regional stock exchange of its kind in the world, the BRVM of WAMU.
Prospects for the continents´ securities exchanges look good. Persistent and high economic growth especially since 2001, the commodity price boom, macroeconomic stability, reduction in political instability and internal strife, conducive macroeconomic policies, and deepening regional economic integrations anchor growth and maturity of securities exchanges in the continent.
However, most securities exchanges in the continent still face serious challenges. Among others these include, low market capitalisation, few listed companies, low liquidity, few stocks and information and disclosure deficiencies.
Against this backdrop, most African securities exchanges are the world´s best performers in terms of return to investment. 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. However, 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.
In addition to this, the emerging market funds continue to ignore African listed securities exchange due to their smaller market size and lower liquidity. Like other investment decisions makers in the West, the decisions of these funds to shun Africa are not based on sound economic principles. The criteria of US$50 and US$10 billion market capitalisation and value treaded respectively sounds very stringent. Many stock exchanges may not be able to hit these thresholds in the near future. While African securities exchanges are required to enhance their regional integration to alleviate their size and liquidity problems, investors from the west are required to tone down their requirements to invest in the continent.
Africa is a land of opportunity in the 21st century. Investors in the West should not be bogged down by the continents´ long dark history. Africa is shining at present. They should be able to seize this opportunity.
At the bilateral and multilateral levels, Africa does not need any more pity. What Africa needs is massive injection of portfolio and foreign direct investment. The aid business failed to lift Africa from poverty during the past 50 years. The three important things Africa need at present are investment, investment and investment. Invest in African stocks, invest in African real sectors and make a difference.
References
Levine, R. 1997. Stock markets, economic development and capital control liberalisation. Perspective, Investment Company Institute, Occasional papers, Vol 3. No.5
Ndikumana, L. 2001. Financial market and economic development in Africa. Political Economy Research Institute, University of Massachusetts, Working paper series, No. 17.
Yartey, CA. and Adjasi, CK. 2007. Stock Market development in sub-Saharan Africa. Critical issues and challenges. IMF Working paper. No. WP/07/209.
World Bank 2006. Private Sector Development Blog. A Market Approach to
Development thinking
http://psdblog.worldbank.org/psdblog/2006/12/why_doesnt_afri.html (Retrieved on 18/09/2008).