Ideas & Debate

A pan-African bourse holds key to raising growth funds

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People from a school group look at an electronic screen with stock index figures at the Johannesburg Stock Exchange. A pan-African bourse could go a long way in raising funds for development. FILE PHOTO | NMG

The 2018 edition of Absa Africa Financial Markets Index (AFMI) is out. Kenya is ranked third, up from fifth in the previous year with an overall score of 65, behind South Africa and Botswana. Key reason behind the rise was the ease to access of foreign exchange where Kenya led the continent with an enviable score of 93.

It, however, scored poorly on markets depth (44) and capacity of local investors (33). Nonetheless, an overall notable achievement. That said, todays article focuses on the case for a pan-African stock market. Here are three reasons why.

One, African stock markets are notoriously fragmented and shallow compared to their equivalent in Latin America and Asia, a key cause of the perennial liquidity problem. There are roughly 30 stock exchanges (up from just five in the 1980s) and half of these have equity market turnover of less than 10 percent of market capitalisation. Ten have bond turnovers of less than 10 percent of outstanding bonds.

Further, the average market capitalisation of the 20 countries covered by the AFMI report stood at less than 60 percent of GDP—only three countries (South Africa, Botswana and Ghana) have market capitalisation greater than 100 percent GDP. A pan-African united pool (augmented by a harmonised trading regime) would not only help boost liquidity but is also highly attractive to international investors.

Two, ongoing African transformation agenda needs significant resources. The African Development Bank estimates the continent’s infrastructure needs are as much as Sh17.5 trillion per year up to 2025. To meet its universal energy needs by 2025, for example, policy makers must mobilise between Sh3 trillion and Sh5.5 trillion annually. With developed financial markets currently demanding steep premiums, this only highlights the importance of strong domestic financial markets in maximising and mobilising of local capital.

Sovereign bond issues

Total local currency sovereign bond issues stood at more than Sh24 trillion in 2017, up from Sh2.8 trillion in 2000. This includes 94 percent of Treasury bills in 2000 compared to around 80 percent in 2017. Three, to thwart increasing competition from “outside” exchanges.

It is not widely known that the London Stock Exchange (LSE’s) is now the biggest “African” stock exchange outside South Africa-listed African companies, boasting a collective valuation north of Sh10 trillion. With Trojan-horse initiatives such as “Companies to Inspire Africa”, African stock markets risk losing their best opportunities to competing exchanges.

If you ask me, a pan-African exchange is a viable idea. Capital markets should and must play a vital role in Africa’s future. With over one-third of the sub-Saharan economies expected to grow above five percent in 2019 to 2020 according to recent IMF World Economic Outlook forecast—global expansion is set to weaken at 3.5 percent in 2019 and 3.6 percent in 2020, a single exchange can help sustain this momentum.

Individual exchanges can tap inspiration from the recent signing of the African Continental Free Trade Agreements to usher this dream. It’s time, and the African exchanges linkage project is a good place to start.