The Significance of African Capital Markets

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Africa has a broad range of market conditions, from rapidly developing economies to countries with a long history with financial markets.

The Continent’s Capital Markets have experienced rapid transformation in recent times that one would hardly not notice.

Today, the continent is among the fastest-expanding economic regions. It is worth knowing that Africa and Asia (excluding Japan) were the only continents that grew during the recent global recession.

Capital market access is key to economic and industrial growth, it makes countries less dependent on donor aid and loans from foreign governments to finance investment and expenditure.

When we talk about Capital markets, we are referring to stock exchanges, Bond Markets, and Foreign exchange markets.

The capital markets play an important role in the economic development of Africa, as they facilitate growth in the real sector by giving producers of goods and services, and entities tasked with infrastructure development access to long-term financing.

The African Capital Markets have increased the investor base by tapping into the huge financial resources of institutional investors.

Despite being home to more than 36 stock exchanges that serve 43 economies and its growth in recent times, Africa’s capital markets remain relatively underdeveloped.

They are still underdeveloped because there is a lack of curated investment information, stock exchanges keep charging for information, poor investment into shareholder education, and inefficient dissemination of information by stock exchanges among other reasons.

North American, European, and the major Asian markets have greater scale, participation, and depth, and attract enormous capital flows than the African capital markets. One may want to ask why it is so? Obviously because of the numerous challenges the African capital markets encounter.

In 1993, the African Securities Exchange Association, ASEA offered to help develop and promote the capital market landscape on the continent and to catalyze economic growth and societal transformation.

The resulting efficiencies from this offer enabled broader market participation, increased intra-African flows, deepened market liquidity, and expanded access to funding. However, much more remains to be done.

These capital markets have remained concentrated in a handful of capitals.

Several exchanges on the continent have been visible in the last two decades and it could be felt in the economies of South Africa, Nigeria, Mauritius, Kenya and Egypt, Angola, Cameroon, Lesotho, Libya, Rwanda, and Seychelles.

Some notable emerging markets do not even host stock exchanges. This includes one of the continent’s fastest-growing economies, Ethiopia. However, its cabinet recently endorsed establishing an exchange.

Africa’s capital markets are entering a new post-Covid-19 phase, where historical market performance is no longer a reliable guide for future outcomes.

World markets are fast-changing, and Africa now has a real chance to accelerate the development of its capital markets sector.

This development is all the more critical given that traditional funding avenues are narrowing due to a complex mix of already high debt burdens, shifting Environment, Social and Governance (ESG) investment demands, and a realignment of global politics.

Africa must grab on to the present low-interest-rate environment and deep market liquidity to re-price its debt and invest in the development-inducing infrastructure needed to ensure sustainable long-term growth.

The continent already is playing a leading role in the development of green, blue, and Islamic financing.

While a great deal more needs to be done, the capital markets are set to become a significant avenue for diversifying Africa’s funding structures.

To achieve this, both the private and public sectors must change their path to market, moving from greater accountability to greater oversight and greater cooperation as the tumult in world markets is far from over.

Strengthening Funding Base

There has never been a better time for Africa to strengthen its funding base through a mix of privatization (equity), tenor (debt maturity), currency (local and foreign), and bondholders (local and foreign).

However, less developing countries may be seen as the victim of a seemingly inescapable cycle, where poor economic performance leads to the lack of foreign and domestic investment capital that handicaps their development.

Local capital market development that aggregates domestic private sector funds offers a path to break this vicious cycle. Deploying local capital to fund infrastructure investments that enhance performance will ultimately crowd in private sector businesses and attract foreign debt and equity capital.

Countries face multiple challenges in developing capital markets, such as inadequate market infrastructure, weak or inappropriate regulation and supervision, and the lack of reliable information on issuers. They also often face both limited demand and supply.

For capital markets to function properly, they need a critical mass of investors, such as pension funds and insurance companies. These investors play a catalytic role in market development and add liquidity to the system.

But such an investor base remains limited in many developing countries. One study found that while pension assets account for about 50 percent of GDP on average in developed countries, they account for only 20 percent on average in many developing countries, especially in Africa.

Again, in these developed countries, there is often a supply of issuers but the number of issuers willing and capable of accessing markets is limited in many developing countries, with the cost and complexity of issuing securities restraining interest.

Extremely low liquidity from insufficient supply and demand tends to lead to extremely high volatility, as there could be no demand when someone tries to sell a position, causing the price to collapse.

While so many African countries have tried to harness the benefits of capital market development, they have not always succeeded.

In several countries where stock exchanges have been created, there are only a few companies listed. For example, a study of 20 middle-income countries found that the 10 largest companies represent more than half of the market capitalization in almost half the countries.

Even as capital markets strive to grow in Africa, it still faces many challenges that are not limited to market concentration, limited opportunities for new firms to access equity, and risky and potentially volatile retail investing, among others.

As efforts are being put together regionally and continentally to ensure that African capital markets operate at par with counterparts across the world, countries on the continent should see to it as a point of duty to restructure their plans to grow the sub-sector, as it is not to be neglected when it comes to the economic growth of a country.

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