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Dismal liquidity still haunts African bourses

Of 20 African economies reviewed, only South Africa, Botswana and Ghana have market caps greater than 100% of GDP; in 14 countries it is lower than 50%.
Traders take a break at the trading floor of the Nigerian Stock Exchange in Lagos, Nigeria. Picture: Reuters

South Africa’s financial markets remain the most attractive option for international investors looking to enter Africa, according to the 2018 Absa Africa Financial Markets Index.

The latest index – which evaluates market development in 20 countries, highlighting economies with clearest growth prospects – shows that South Africa’s ‘twin peaks’ strategy for improving financial regulation stood out among the frameworks introduced over the past year, boosting performance for the index as a whole.

The 2018 index extended coverage to three new countries –Angola, Cameroon and Senegal – and assessed progress across six key areas: market depth, access to foreign exchange, market transparency, tax and regulatory environment, macroeconomic opportunity, and the legality and enforceability of standard financial markets master agreements.

Absa’s Africa Financial Markets Index 2018 tracks progress on financial market developments annually across a range of countries and indicators.

Prevalent liquidity troubles

The report noted that liquidity is generally low; 10 countries have equity market turnover of less than 10% of market capitalisation, and 15 countries have bond turnover of less than 10% of outstanding bonds.

However, policies to improve market depth and activity are being implemented. Online trading platforms and the development of derivatives products have improved Nigeria’s performance.

“In 2018, Nigerian authorities implemented significant initiatives to boost the capacity of local investors,” says George Asante, head of markets (excluding South Africa) at Absa Group. “This is a good example for regulators to break away from legacy restrictions on, for example, the use of derivatives as a tool for effective portfolio management and the situation where there is a disproportional allocation of investments in low yield risk-free instruments.”

In addition, only South Africa, Botswana and Ghana have a market capitalisation greater than 100% of GDP, while in 14 countries it is lower than 50%. Some economies that have high GDP growth figures, such as Ethiopia, show gaps in capital market development as they lack a securities exchange (apart from one for commodities.)

Meanwhile, there are no equities listed on Angola’s exchange, and both Cameroon and Mozambique have a market capitalisation of less than 5% of GDP. South Africa is the only country where the total value of listed equities is more than $100 billion, at $1.1 trillion.

Continent remains vulnerable to capital outflows

Reforms aimed at improving financial market infrastructure to facilitate foreign capital inflows in some countries have in turn opened the door to capital outflow vulnerability, as is the case for Egypt and Mauritius.

South Africa however remains vulnerable to a high ratio of net portfolio flows to reserves, as attested to by portfolio investment outflows of $16.4 billion leaving the country, against $50.5 billion of reserves held by the South African Reserve Bank.

“The latest index shows a clear trend of African economies becoming more open as central banks have taken steps to liberalise exchange rates, relax capital controls and allowe a more market based determination of exchange rates,” says Asante.

As capital controls and the existence of multiple foreign exchange rates have historically been a concern for investors, Asante argues that the recent policy stance will only attract more investment. “The recent posture of these economies, if continued, could serve as a boost for further capital mobilisation, especially from global investors.”

South Africa has the highest daily foreign exchange turnover to annual GDP ratio among emerging markets, at 17.1%, says the report.

Market transparency, tax and regulatory environment

Nigeria and South Africa stand out in terms of market transparency, with South Africa recently making reforms set to broaden its tax base.

Nigeria has also made fiscal reforms with the stand-out being an exemption of withholding tax for capital market transactions. In addition, government bonds are subject to a tax holiday on income earned to complement the 20 tax treaties and double taxation agreements.

Despite Rwanda scoring the highest score possible for protection of minority shareholders, the report highlights discrepancies between official rules and regulations on transparency and the reality of their implementation.

Low local capacity hinders market liquidity and growth

Local investor capacity in many African countries is low, with pension funds, insurance firms and other investors lacking sizeable assets under management. For Ivory Coast, Egypt, Ethiopia, Ghana, Mauritius, Zambia and Senegal, the ratio of institutional assets under management to domestically listed assets is below 20%.

“The capacity of local investors has lagged behind economic growth across most countries,” says Asante. “This has denied the various local financial markets the ability for local investors to buffer sharp price movements from periodic disinvestments from offshore investors.” He adds that it also results in a minimal take-up rate by local investors in local-content focused initial public offerings (IPOs), as in the case of Vodacom Tanzania and MTN Ghana.

Sub-Saharan Africa’s depressed local capacity continues to be affected by a low savings culture, delays in reforming or liberalising the pensions and investments sectors, and regulatory restrictions.

South Africa, however, is an outlier – with pension fund assets per capita registering at US$5 411, equity market turnover at 40%, and corporate bond turnover of 106%.

Strengthening legal frameworks to build confidence

Despite rapid growth in African adherence to standard international master agreements, efforts to match global standards remain slow. These agreements standardise definitions and contractual terms, reducing the likelihood of disputes and providing guidance for resolution when necessary. “For investors, standard agreements add a degree of protection and can reduce the costliness of entering a new market,” says the report.

Asante adds: “Countries like South Africa, Kenya, Mauritius, Rwanda and Zambia have made significant progress, with contract netting positions and collateral arrangements being well supported in law and the legal regimes encouraging the adoption and use of standard financial market documents such as International Swaps and Derivatives Association (ISDAs) and Global Master Repurchase Agreements (GMRAs).”

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Unsurprising, the lack of foresight and long term planning in Africa is infamous. I also find that there is little desire to invest into domestic assets which is beyond confusing.

That is on top of all the other problems in Africa, Nigeria has to be one of the hardest places on earth to do business.

If anyone wants to invest in these Mickey Mouse exchanges, have at it. I’ll watch from the sidelines, thanks.

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