a comparative analysis of theperformance o fafrican capital market volume 2 2010

A COMPARATIVE ANALYSIS OF THE PERFORMANCE

OF AFRICAN STOCK MARKETS FOR THE PERIOD 2008-2009 VOLUME II

Research, Policy Analysis and Planning Department

JUNE 2010

RUNNING HEADER: A Comparative analysis of the Performance of African Stock Markets

ABSTRACT The performance of capital markets is of significant importance to investors as they expect good

returns on their investment. To policymakers, stock market parameters such as indices are

recognized as leading indicators of economic activity. The level of stock prices can also have a

direct impact on consumption through the wealth effect. Given the importance of stock markets,

studies of their role in African economics are few and far between. Studies of the comparative

performance of African stock markets are even rarer. The comparison of performance against

other countries in Africa and beyond is an important initiative, since the Kenya Vision 2030

outlines the need for Kenya to be globally competitive. This research paper is an effort to fill the

void in this area of study. We compare the performance of 15 securities markets in Africa

including the 6 largest markets during the 2 year period, 2008 to 2009. This follows the baseline

research paper on the comparative performance of African securities markets, 1997-2003,

which provides significant input to this paper. This research paper has been adopted as a

working paper of the RPAP department and forms the first study in a new series of comparative

performance of Africa’s securities markets.

Contents Page Number Abbreviations

Executive Summary

1.0 Introduction 20-23

1.1 Background to the Study

1.2 Structure of The Study

1.3 Significance of the Study

1.4 Objectives the Study

1.5 Scope of the Study

1.6 Limitations of the Study

2.0 A Brief Literature Review 23-30

3.0 Research Methodology 31-32

3.1 Data Collection

3.2 Data Analysis

3.3 Presentation and Findings

4.0 Analysis and Findings 33-65

4.1 The State of African Capital Markets

4.2 The State of African Bond Markets

4.3 Profiles of African Stock Exchanges

5.0 The Global Financial Crisis 66-72

6.0 Recommendations & Conclusion 73-80

Bibliography

List of Tables: 1.1 List of African Stock Exchanges

1.2 African stock exchanges market capitalization

1.3 Number of listed companies

1.4 Market Capitalization of Listed companies (% of GDP)

1.5 Market turnover/Value traded

1.6 Volume traded

1.7 Turnover Ratio

1.8 Turnover (% of GDP)

1.9 Annualized % growth of market capitalization

1.10 Domestic debt in sub-Saharan Africa

1.11 Value of Bonds traded

1.12 Bond turnover (% of GDP)

1.13 African stock exchange structure

1.14 Automation of African Stock Markets

1.15 Demutualization trends

List of Charts:

1.1 Number of listed companies

1.2 Market capitalization (% of GDP)

1.3 Turnover Ratio

1.4 Turnover (% of GDP)

1.5 Annualized % returns to African equity markets

1.6 Average annual dollar returns to various regions

1.7 USD returns to African equity markets (2006)

1.8 USD returns to African equity markets (2007)

1.9 Annualized % growth of market capitalization

1.10 Standard deviation of annual returns

1.11 Risk-Return ratio

1.12 Bond market development in Africa

Abbreviations GDP Gross Domestic Product HIPC Heavily Indebted poor countries IOSCO International Organization of Securities Commissions MDRI Multilateral debt relief initiative OECD Organization for economic cooperation and development S & P 500 Standard & Poor’s 500 SEMDEX Securities Exchange and Development Enterprise Market Index SSA Sub-Saharan Africa USD United States Dollars WAEMU West African Economic and Monetary Union WEO World Economic Outlook

EXECUTIVE SUMMARY

Over the period 2000-2007, Sub-Saharan Africa (SSA) enjoyed robust growth and, in a context

of abundant global liquidity, attracted an increasing number of investors in search of high yields.

As a consequence, private capital inflows, including FDI, portfolio equity flows and debt flows

(i.e. portfolio bond flows and bank lending) experienced remarkable increases. Private capital

inflows took off, driven by a number of domestic and external factors that contributed towards

enhancing the region’s attractiveness for foreign investors in search of high yields. Net foreign

direct investment (FDI) inflows grew progressively; portfolio equity flows took off; bonds flows

rapidly increased; and international banking activity all expanded significantly.

However, the financial turmoil originating in the developed world in August 2007 has since

spread to developing countries, and SSA has not been immune to the secondary effects of the

global financial crisis. SSA’s growth dropped from 6.9% in 2007 to 5.5% in 2008; in January

2009, the International Monetary Fund (IMF) once more cut its forecast for growth that year by

1.6 % to 3.5%. In April 2009, the IMF revised again its forecast leading to a new projection for

SSA growth in 2009, equal to 1.7%. Private capital inflows to SSA were relatively robust up to

the first half of 2008, but dropped sharply from the third quarter of 2008, owing to a reduced

capability and propensity to invest on the part of foreign investors. Many bond issuance plans

were put on hold in countries such as Ghana, Kenya, Tanzania and Uganda. FDI inflows

continued to grow, but at a lower rate. Portfolio equity flows slowed down and sometimes

reversed, consistent with sharp falls in stock markets in South Africa, Nigeria, Kenya, Mauritius

and Côte d’Ivoire1.

In 2009 there was a marked divergence between the performance of the larger emerging

markets (up 74.5%) and the G7 markets (up 24.2%) relative to frontier markets (up 7%) and

Africa (down 6.9%) making 2009 the second consecutive year in which African equities have

underperformed most other regions of the world. This was largely liquidity driven as investors

1 The global financial crisis and sub-Saharan Africa The effects of slowing private capital inflows on growth; José Brambila Macias and Isabella Massa; African Economic Conference 2009

faced with near-zero interest rates searched for higher yields among the larger, more liquid,

stocks and markets. However there remained a premium attached to liquidity as investors

sought to protect themselves in the event that risky positions had to be unwound quickly,

resulting in a focus on the larger stocks and markets. In such an environment, our smaller

African markets were doomed to underperform.

A. THE PERFORMANCE OF AFRICAN EQUITY MARKETS

The Analysis is based on evidence from 15 African stock exchanges which represents 65% of

the total population of African Stock Exchanges. It has also taken into consideration the

significance of the following exchanges: Kenya, Ghana, Egypt, Morocco, Nigeria and South

Africa, which constitute of approximately 90% of stock exchange activity in the region. South

Africa alone constitutes of approximately 70% of stock market activity in the region.

i. Market Capitalization

As at December 2009, the WFE total market capitalization was US$46.5 trillion. African stock

market capitalization accounted for a meager 2% during the period under review. In 2008, only

Ghana, Malawi, Tanzania and Tunisia registered an increase in market capitalization. However,

market performance improved in 2009 with a majority of stock markets posting a positive capital

appreciation with the exception of a few including Kenya, Nigeria and Ghana. In 2008, Malawi

Stock exchange registered the best performance while South Africa and Tunisia took the honors

in 2009. Market Concentration of the 5 largest exchanges in Africa is 95%. Data data indicates

that the Nairobi Stock Exchange, as at December 2009, was ranked 5th in Africa in terms of

market capitalization behind South Africa, Egypt, Nigeria and Morocco2. Ghana ranks in at a

close 6th. It will suffice to note that the Market Capitalization figures of Namibia and Botswana

only include the Listed Domestic Companies. This is because the two exchanges both have

domestic and foreign boards. In this regard, inclusion of the M-Cap of the foreign board will

make them rank 2nd and 3rd respectively in Africa.

ii. Number of Listed Companies

2 It would suffice to note that Market Cap figures of Botswana and Namibia only represent locally listed companies leaving out the foreign component which ensures comparability of data.

On the global front, African stock markets accounted for approximately 3% of listed companies

as at end of 2009. In this particular year, the net effect of new listings and de-listings was -76

companies. The number of firms listed has declined over 2006-2009 (growth rate of -4%) with

the well established markets of South Africa and Egypt recording significant drops in the number

of firms listed. The JSE has the highest number of listings on the continent numbering 396 and

accounting for approximately 26% of the total number of listings in African stock exchanges.

The Egyptian Exchange follows with 313 listings (21%) and Nigeria with 216 listings (14%).

Kenya ranks 6th in this indicator of stock market size behind South Africa, Egypt, Nigeria,

Morocco and Zimbabwe. Consequently, the top six stock exchanges in the continent with

regards to number of listings account for 76% of the total listings on African stock exchanges

while the top three exchanges account for 61% of total listings.

iii. Market Capitalization as a % of GDP The mean market capitalization (as a percentage of GDP) of 37.89% (28.75% excluding

S.Africa) pales in comparison to that of Malaysia of 149.46% but comparable to that of Turkey,

Argentina and South Korea. The size of the markets has, however been growing, with the mean

for Africa growing from 17% of GDP in 1991 to 38% in 2009. South Africa leads the pack with

an average market capitalization to GDP ratio of 211.67%. This is then followed by Ghana

(60.88%); Morocco (59.22%); Egypt (55.37%); Mauritius (54.59%); Botswana (31.86) and

Kenya at 31%, ranking it 7th in this measure.

iv. Equity Turnover

As of 2008, the analysis suggests that the most actively traded market in Africa is South Africa,

accounting for over 70% of the entire African stock exchanges turnover. This makes it the most

liquid stock market in Africa. Egypt, Morocco and Nigeria account for 17%, 4%, and 3%

respectively. Tunisia (0.5%) and Kenya (0.2%) rank 5th and 6th respectively. The global equities

turnover was approximately USD 113 trillion in 20083 making Africa’s contribution to this figure

stand at approximately 0.005%.

v. Volume

3 WFE Annual report, 2009.

From the analysis, stock market volume has been dominated by Nigeria of which accounts for

61% of total African stock exchanges share volume in 2008. This is followed by South Africa

(26%); Egypt (8%); and Kenya (1%). Kenya is ranked 4th in this indicator. The top four

exchanges account for approximately 98% of total share volume with the top two accounting for

88% of total share volume.

vi. Turnover Ratio

The mean turnover ratio for African stock exchanges for the period under analysis was 13.09%.

The markets that registered a higher mean turnover ratio than the African average were: South

Africa (55%); Egypt (41%); Morocco (*40%); Nigeria (21%); Kenya, ranked 5th in this parameter,

registered a mean turnover ratio of 11% for the period under analysis.

vii. Equity Turnover as a % of GDP

South Africa ranks first in Africa in this indicator registering a mean turnover to GDP ratio of

63% in 2008. This is then followed by Egypt (57%); Morocco (29%); Namibia (18%); Nigeria

(7%); Mauritius (5%) and Kenya (3%). Kenya was ranked 7th in the continent.

viii. Annualized Index Returns

For the period 2007-2009, annualized dollar index returns in African capital markets have been

greatly affected with only Ghana, Tanzania, Tunisia and Zambia registering positive returns for

the 3 year period. In 2008, Ghana stock exchange registered the highest dollar index return in

Africa registering an increase of 58%. Other markets that registered positive growth in Africa

during this period were Malawi (26%); Tanzania (21%); Tunisia (11%) and Zambia (18%). The

Egyptian and Nigerian Stock Exchanges were the worst performing markets during the period

under review registering decreases of -56% and -46% respectively. Kenya was the 5th worst

performing market during the review period registering an index decrease of -35%. However, in

2009, market performance registered significant improvement with most markets registering

positive returns. Tunisia was the best performing market in Africa registering an index increase

of 48%. Other significant increases were observed in South Africa, Mauritius, Namibia, Zambia,

and Egypt stock exchanges. Kenya continued to register negative growth as the index declined

by 8% during the period.

ix. Annualized Growth in Market Capitalization

During the period under review, average annualized percentage growth of market capitalization

registered mixed performance. In 2008, only three markets registered positive performance in

this indicator namely; Tanzania (36%), Tunisia (27%) and Ghana (17%). However, there was a

marked improvement in 2009, with only 5 African markets registering negative growth. These

included Nigeria (-41%), Ghana (-27%), Malawi (-17%), Morocco (-7%) and Tanzania (-6%).

The Nairobi stock exchange just recovered its pre-crisis market capitalization levels without any

significant increase in accumulated investor wealth during the period under review.

B. THE PERFORMANCE OF AFRICAN BOND MARKETS

Bond market development in Africa has been on the rise with several countries, albeit them

being small and inactive, establishing these markets. Critical factors undermining the

development of bond markets in Africa include, but not limited to:

• Lack of institutional and operating infrastructure

• Low levels of liquidity

• Narrow investor base

• Narrow issuer base

• Short Maturities

• High borrowing costs

i. Turnover

The largest bond exchange in the continent is the Bond Exchange of South Africa accounting

for 96% bond turnover in the continent. The rest of Africa’s bond markets numbers are simply

negligible. In 2008, the total value of bonds traded (in USD bn) stood at USD 2,416 bn. When

compared to global bond markets, Africa accounted for 2% of global bond turnover4.

4 IMF

ii. Bond Turnover as a % of GDP

Table i: Bond Turnover as a % GDP

COUNTRY 2006 2007 2008 SA 779.35 809.41 842.60 Botswana 0.00 0.00 0.28 Morocco 0.00 0.00 0.00 Egypt 1.81 3.34 2.18 Ghana 3.33 20.67 0.00 Sudan 1.10 1.16 1.30 Kenya 2.96 4.92 3.64 Namibia 2.15 2.27 1.22 Nigeria 2.69 14.75 30.99 Mauritius 0.01 0.05 0.00 Uganda 0.34 3.98 4.00 Zambia 0.00 0.00 0.01 Tanzania 0.30 0 0.21

Source: CMA Database

Table ii: Comparative BTO as a % of GDP

2006 2007 2008

Kenya 2.96 4.92 3.64

Egypt 1.81 3.34 2.18

South Africa 779.36 809.41 842.60

India 4.98 5.49 9.94

Malaysia 0.23 5.49 0.17

Srilanka 0.02 0.02 0.00

Canada 0.38 0.33 0.31

The same trend is observed as indicated earlier. South Africa’s bond market turnover is 8 times

the size of its GDP with other African markets having marginal bond market activity when

compared with broader economic activity. The analysis indicates that African bond markets

have not yet been efficiently and effectively tapped with regards to unleashing their enormous

potential in deepening capital markets as well as contributing to economic growth. This should

be an area of special focus for policy makers in stimulating and sustaining their development.

C. PERFORMANCE OF COMMODITIES AND FUTURES MARKET According to United Nations Commodities Trading Statistics the volume of global commodities

trading was estimated at USD 192 Trillion. The derivatives market is much bigger with the total

value of derivatives estimated at more that USD 1,000 Trillion in 2009. In Africa only South

Africa has a vibrant derivatives market while Nigeria is moving towards its implementation. The

rest of Africa only have commodities markets in place.

Derivatives markets are very important for the development of capital markets in Africa as they

can facilitate the management of financial risk exposure, since they allow investors to unbundle

and transfer financial risk. In principle, such markets could contribute to a more efficient

allocation of capital and cross-border capital flow, create more opportunities for diversification of

portfolios, facilitate risk transfer, price discovery, and more public information.

In 2008 futures and options comprised 57% of South Africa’s trading volume, with only 1%

attributable to Agricultural Commodities Trading. During the same year the country traded 9% of

the total volume futures and options in emerging markets OTC derivatives market. Kenya is yet

to develop a derivatives market but following the pronouncement during the National Budget

speech 2010 that regulations to allow commodities futures trading are going to be put in place,

there is reason for optimism

D. INFRASTRUCTURAL FACILITIES OF AFRICAN STOCK MARKETS

In analyzing the infrastructural characteristics of African capital markets, it is plain for all to see

the almost identical nature of the trading mechanisms, systems and products available in these

markets with the exception of South Africa, Zimbabwe, Mauritius, Namibia, Egypt and Morocco.

These are the same stock markets that are giving Kenya’s stock exchange stiff competition.

Some similar characteristics come out very clearly from this analysis that are inherent in Africa’s

leading stock exchanges and that are not characteristic of Kenya’s and many others namely:

i. The diversified nature of the available mechanisms used for trading in these markets.

These include On-line trading; Margin trading and short Selling and Borrowing;

ii. No restrictions to foreign participation in the stock market;

iii. Shorter settlement cycles;

iv. No Tax restrictions in some of these markets e.g. Egypt, Morocco and Mauritius. In

South Africa, they are no tax restrictions for resident investors; and

v. Availability of a derivatives market in the case of South Africa.

The diversified nature of trading mechanisms significantly increases volumes and turnovers of

stock exchanges. The same can be said for having derivative markets as this is an additional

product to the current mix offered by African stock markets which will create an alternative

investor base in the capital market and also acts as a hedging product for investors in the equity

as well as bond markets. This in turn increases activity in exchange traded products universally.

In addition, Sub-Saharan African stock exchanges are gradually adapting to electronic systems,

but many of them still use manual trading systems as well as manual clearing and settlement

systems. The exorbitantly low turnover indicators we observed earlier should partly attributable

to these manual systems. Thus, it is important that sub-Saharan African stock exchanges adapt

fast to automation and electronic systems. This adaptation reduces the costs and inefficiencies

associated with manual systems increases trading activity and liquidity in the stock markets by

speeding up operations.

A comparative analysis of the performance of African stock markets

14 | P a g e

E. RECOMMENDATIONS: The examination of the current state of African stock markets indicates the many challenges

that these markets face specifically in terms of low capitalization and liquidity. However, they

continue to perform remarkably well in terms of return on investment. The recommendations

proposed in this paper should not be viewed independently but rather as part of a whole fabric,

as essential units to a process dedicated to the goal of capital market improvement. All-in-All,

the recommendations are meant to serve as guidelines to policy formulation and decision

making. The thinness and illiquidity of the current African stock markets, shortage of domestic

resource mobilization, the regions marginalization in the global markets for financial capital,

coupled with shrinking official aid flows, are at the heart of the challenges that these

prescriptions are intended to address. The following recommendations are made:

i. Develop Incentives for listing on Stock exchanges as a means to achieve greater market

depth and trading activity. These include tax and fiscal incentives;

ii. Foster public confidence and improve informational efficiency with disclosure rules,

accounting standards, enforceability of contracts, consistent with International best

practices;

iii. Develop a well functioning stock market regulatory regime;

iv. Privatization of state owned enterprises should be encouraged to be facilitated through

stock exchanges;

v. Strengthen institutions for corporate governance and adopt best international practice in

terms of measures for the effectiveness of the corporate Board of Directors and

increased shareholder rights against controlling shareholders/management;

vi. Consolidate the African stock markets and harmonize laws, regulations, capital market

institutions and monetary systems across the integrating regions;

vii. Development of a talented financial manpower capable of managing risk for both the

banking and equity market sector toward the enhancement of risk control mechanisms

as markets become more sophisticated, and possibly venturing into the derivatives

arena;


15 | P a g e

viii. Conduct privatization programs with transparency and ban government intervention in

the privatized enterprises and engage in full privatization rather than partial privatization

to avoid continuing government interference;

ix. Foster the development of institutions that support and sustain African stock markets

such as pension funds, credit rating agencies etc;

x. Develop a comprehensive capital market database to foster both practitioner/investment

analyst research and academic research-making it possible for African stock markets to

be subject to best research practices;

xi. Quickly transform from manual into automated/electronic manual systems; the latter are

now the norm in the more advanced stock markets;

xii. Consider demutualizing the stock exchanges as a mechanism for improved governance

stemming from separation and ownership of exchanges and promoting investor

confidence in the system; and

xiii. Introduce measures that help foster linkage between formal and informal financial

systems, with eventual graduation into the stock markets.

In the case of Kenya, while all the above prescriptions apply, there are specific policy

formulation areas we could focus on immediately when compared to markets outperforming the

NSE in the continent which include:

a. To increase market size:

i. The provision of more incentives and programmes to encourage more listings on the

stock exchange: In South Africa, the main driver of new listings has been their active policy of looking for new companies that qualify for listing throughout the whole country whether large or small. They also arrange many international road

shows;

ii. The development of an Alternative Issuing and Trading Platform that will cater for the

majority of companies that may wish to list but are hindered by the stringent

exchange requirements that could serve as an incubator market to the main

exchange. In South Africa, there is already in place an alternative exchange (AltX)

for quality small to medium companies. This is also the case with the Mauritius DEM.

(The study proposes that the Mauritius model could be adapted in the Kenyan

context)


16 | P a g e

iii. The introduction of a derivatives market: The JSE has also operated a single stock

futures market (SAFEX) since 2001 which is now the largest such market in the

world. The development and operationalization of the Kenya Agricultural

Commodities Exchange would be a step in the right direction;

iv. The development of mechanisms to encourage companies to engage in dual listings;

and

v. The aggressive pursuit of establishing MOU’s with regional exchanges to encourage

cross-listings.

b. To increase liquidity in the stock exchange:

i. The complete automation of the market microstructure. This adaptation reduces the

costs and inefficiencies associated with manual systems increases trading activity and

liquidity in the stock markets by speeding up operations;

ii. The introduction of alternative trading mechanisms in the stock market especially on-line

trading, margin trading and short selling. However these mechanisms can only be

introduced once the stock market infrastructure and microstructure is fully automated;

iii. Consider policies to increase the amount of shares available for sale in the stock

exchange (free float) without actually affecting the demand for the same shares. This

can be achieved either through cross-listing, dual listing or integration of stock

exchanges; and

iv. Actively engage in programs aimed at achieving greater public confidence. Among the

principal measures that could assist in confidence-building are:

• Increasing media understanding and reporting on business matters;

• Increasing the enforcement authority of government agencies;

• Committing to public education as a primary goal of the public sector;

• Enlarging the capacity for institutional investing by pension and retirement funds; (as

the retail investors savings pool is traditionally low in Kenya)

• Encouraging issuance of preferred shares and corporate notes by private

companies; and

• Eliminating the second-tier labeling of listed securities as it is possible that this may

be viewed negatively by some companies as is the case in Kenya and Mauritius

before the latter rebranded the market.


17 | P a g e

It is encouraging to note that the Kenyan capital market is undergoing major reforms that are

geared towards addressing some of the issues highlighted above, in particular, the review of the

legal framework, the demutualization of the NSE, development and formalization of the OTC

markets, investor and public education and the adoption of a risk based supervisory regime.

c. Bond Market Reforms

Bond markets, however, which are an integral part of the capital markets, remain largely

underdeveloped in Africa with corporate bond markets nonexistent or in their infancy. Indeed, in

most African countries the public sector dominates debt issuance, mainly with debt instruments

of very short tenor and activities focused on the domestic primary market with limited secondary

trading. Bond markets are characterized by fragmented markets, high transaction costs,

illiquidity and general dissatisfaction with the primary dealer system. There is a fragmentation of

the market as evident by an excessive number of bonds issued with no benchmark bonds and

insufficient liquidity in each of the issues. In some countries such as Botswana, there has been

a lack of government bond issues largely because the governments has hitherto run budget

surpluses or have access to cheaper concessional donor funds5. In addition, there is a general

dissatisfaction with the Primary Dealer (PD) system among the regulators who argue that the

PDs do not effectively discharge their market-marking functions while the dealers are concerned

about the insufficient incentives. Also, there is a lack of issuance programs which impedes

potential investors (and PDs) from anticipating the future supply of securities.

Further, there is a pre-dominant “buy and hold” strategy by investors in the region coupled with

limited corporate issues and a narrow investor base. The “buy and hold” strategy serves to

exacerbate the problems arising from a limited supply of securities. The limited corporate issues

are a reflection of the competition from bank loans, underdeveloped corporate advisory services

coupled with excessive issuance costs and restrictive regulatory practices. Additionally, in

several countries both the government and corporate bond markets are constrained by the

narrow investor base which may partly be a reflection of the dominance of government-run

statutory funds in the institutional investment sector and a legal framework that does not

5 This may change in 2009/10 as increased expenditures and lower revenues are expected to create a deficit of 14% of GDP in 2009/10 which will be financed using government reserves and savings and, if required, by borrowing in domestic and international markets (Botswana 2009/10 government budget).


18 | P a g e

encourage the emergence of private pension funds and asset managers and/or the restrictions

on the entry of foreign investors.

The overall assessment of this report is that while bond markets at a national and regional level

remain largely underdeveloped, several initiatives are underway by governments, private

sectors and donors, however, with limited effectiveness. These are aimed at addressing

deficiencies in the legal system, enhancing bond issuance, broadening and diversifying the

investor base, strengthening market infrastructure, developing supranational, sub-national and

corporate bond markets and the promotion of regional initiatives. While pockets of collaboration

exist, a more inclusive partnership on the ongoing and planned initiatives is needed so as to

leverage synergies and maximize the effectiveness of the initiatives.

Market Reforms will have to focus on the following key issues:

• How Local and Global capital can be harnessed by efficient markets

• Investors will want to see:

– certainty - of owning and selling securities

– market liquidity

– depth and breadth of securities and reflection of the economy

– more and new products (derivatives)

– fair and equal treatment

– ease of trading

– low cost of trading

• Issuers will want to see:

– ease of raising capital

– efficient pricing

– tax breaks

– low costs associated with issuing

The following recommendations are therefore proposed:

• Tax breaks to encourage more and varied issues

• Encourage listings that reflect the economic mix

• Lower trading and settlement costs


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– Negotiated brokerage

– Lower statutory charges on higher turnover

• More and varied products e.g. derivatives

• Dematerialization of the securities industry

• Electronic trading including on-line trading

• Information availability – both company and trading

• Fair and equal treatment of all investors

• Separate brokers from market oversight

• Certainty and transparency around new primary issues

• Ease of securities placements

• Pension industry reform

– More investment products e.g. unit trusts and ETFs

E. CONCLUSION

To the casual observer, one glance at the performance of African stocks in 2009 may be

enough to convince them the continent’s stock exchanges severely underperformed last year

and was thrown into particularly sharp relief by the Bric indices, which overshadowed Africa with

gains of over 70 % in 2009. But that the future looks promising. As a result of the symbiotic

nature of stock exchanges across Africa, much of the damage done last year were one-off

events in one country that had a knock-on effect on markets across the region. As the effects of

the Global Financial Crisis begin to wear off, we can see markets recovering across the

continent.


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CHAPTER ONE

1.0 INTRODUCTION

Over the period 2000-2007, SSA enjoyed robust growth and, in a context of abundant global

liquidity, attracted an increasing number of investors in search of high yields. As a

consequence, private capital inflows, including FDI, portfolio equity flows and debt flows (i.e.

portfolio bond flows and bank lending) experienced remarkable increases. Private capital

inflows took off, driven by a number of domestic and external factors that contributed towards

enhancing the region’s attractiveness for foreign investors in search of high yields. Net foreign

direct investment (FDI) inflows grew progressively; portfolio equity flows took off; bonds flows

rapidly increased; and international banking activity all expanded significantly.

However, the financial turmoil originating in the developed world in August 2007 has since

spread to developing countries, and SSA has not been immune to the secondary effects of the

global financial crisis. SSA’s growth dropped from 6.9% in 2007 to 5.5% in 2008; in January

2009, the International Monetary Fund (IMF) once more cut its forecast for growth that year by

1.6 % to 3.5%. In April 2009, the IMF revised again its forecast leading to a new projection for

SSA growth in 2009, equal to 1.7%. Private capital inflows to SSA were relatively robust up to

the first half of 2008, but dropped sharply from the third quarter of 2008, owing to a reduced

capability and propensity to invest on the part of foreign investors. Many bond issuance plans

were put on hold in countries such as Ghana, Kenya, Tanzania and Uganda. FDI inflows

continued to grow, but at a lower rate. Portfolio equity flows slowed down and sometimes

reversed, consistent with sharp falls in stock markets in South Africa, Nigeria, Kenya, Mauritius

and Côte d’Ivoire6.

In 2009 there was a marked divergence between the performance of the larger emerging

markets (up 74.5%) and the G7 markets (up 24.2%) relative to frontier markets (up 7%) and

Africa (down 6.9%) making 2009 the second consecutive year in which African equities have

underperformed most other regions of the world. 6 The global financial crisis and sub-Saharan Africa The effects of slowing private capital inflows on growth; José Brambila Macias and Isabella Massa; African Economic Conference 2009


21 | P a g e

This was largely liquidity driven as investors faced with near-zero interest rates searched for

higher yields among the larger, more liquid, stocks and markets. However there remained a

premium attached to liquidity as investors sought to protect themselves in the event that risky

positions had to be unwound quickly, resulting in a focus on the larger stocks and markets. In

such an environment, our smaller African markets were doomed to underperform.

It is increasingly clear that we are observing some tectonic shifts in the structure of the global

economy. Today about 45% of the world’s economy has a deficit of 10% or more, most

concentrated in the advanced economies. In the IMFs view, the outlook for the advanced

economies remains subdued with the current slowdown likely to prove to be structural rather

than cyclical. Confronted with this, investors have turned to the emerging markets to deliver

higher “yield”. While faster growth in the Bric7 countries appears to have temporarily stepped

into the breach opened by the slowdown in the US and Europe, this growth is likely to soon face

significant headwinds. The Achilles’ heel of the Bric economies is their dependence on export-

led growth. With busted consumer markets in the US and Europe, it is unlikely that the Bric

countries can keep their “factory-to-the-world” economies growing for much longer. Although

Bric governments are attempting to lift domestic consumption with enhanced fiscal measures,

wages and incomes are likely to be too low to support the level of demand needed to absorb

their surplus industrial capacity.

Africa is therefore likely to offer sanctuary when investors finally begin to focus on the

fundamental performance of companies and economies. African growth has never been

predicated on exports and has remained robust despite the global slowdown. Corporate

earnings remain strong with average earnings per share growth for 2008: 32 %, 2009: 8 % and

forecast 2010: 22 %. African equities trade on a P/E 2010 of 10.1 times relative to 17 times for

emerging markets and 20 times for advanced economies. The valuation differential between

Africa and other emerging markets is not a reflection of any fundamental difference in economic

outlook. The IMF World Economic Outlook issued on 26 January 2010 projected global growth

in 2010 at 3.9 %, advanced economies: 2.1 %, emerging markets 6.0 % and Africa: 4.3 %.

The investment case for Africa remains intact and today our markets offer rare opportunities to

buy stocks with double digit earnings growth and yet trading on single digit P/E ratings.

7 Brazil, Russia, India and China


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The robust state of economic growth in Africa, the rising consumption power of an emergent

middle class, the advantageous population demographics of the continent and the low valuation

of its equity markets will eventually result in a re-rating of our markets.

1.2 STRUCTURE OF THE STUDY This paper is organized as follows. The first section describes of the performance of African

stock and debt markets based on the available evidence in 2008 and 2009 while benchmarking

the African constituents with other exchanges in selected emerging markets. The paper also

makes note of demutualization trends as well as infrastructural indicators of African stock

exchanges. Finally, the paper extensively comments on the effects of the Global Financial Crisis

and subsequent recession on African stock markets, whilst proposing a way forward.

1.3 SIGNIFICANCE OF THE STUDY

The unavailability of tangible data on the performance of the NSE in the African context is an

impeding factor to effective policy formulation with regards to deepening the capital markets.

There is, therefore, need to have an empirical assessment of the performance of the Nairobi

stock exchange Vis a Vis other African stock exchanges. A quantitative assessment of the

NSE’s performance is a very significant exercise especially with regards to policy development

that will spur the growth of the Kenyan capital markets.

1.4 OBJECTIVES OF THE STUDY:

The Broad objective of the study is to analyse the performance of the Nairobi Stock Exchange

Vis a Vis other African Stock Exchanges, using various performance measurement indicators

for the last 2years.

The specific objectives of the study are outlined below:

• Analyse and compare the performance of the Nairobi Stock Exchange with other African

stock markets for a similar period of time.

• Analyse and compare the performance of Kenya’s secondary debt market with other

African debt markets for a similar period of time.

• Benchmark the performance of the NSE with other emerging markets


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1.5 SCOPE OF THE STUDY

The study analyzes the performance of 15 African stock exchanges. Other markets that have

been analysed for benchmarking purposes include Malaysia, Singapore, SriLanka, Korea

Taiwan, Argentina, Jordan and India.

1.6 LIMITATIONS & ASSUMPTIONS OF THE STUDY

Access to data from secondary sources was difficult. As a result, the study to a large extent

relied on statistics compiled from members of the African Stock Exchange Association (ASEA)

and academic research publications from the IFC, IMF, World-Bank, UNDP etc. In addition,

access to international databases was restricted due to lack of subscription rights availed to the

department. Data for a sizable number of African stock markets is highly fragmented and

somewhat inaccurate when available. This is especially so within the Maghreb and Southern

African regions including Mozambique. As this is a working paper series, quantitative data will

be reviewed on annual basis to smoothen out inconsistencies arising from the use of

unbalanced data panels.


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CHAPTER TWO

2.0 A BRIEF LITERATURE REVIEW

Stock markets have been a growth industry in sub-Saharan Africa. Securities exchanges now

exist in 23 sub-Saharan countries. In 1998, Africa’s first regional exchange, the Bourse

Regionale des Valeurs Mobilieres (BRVM), opened in Abidjan, Ivory Coast, replacing the pre-

existing Ivory Coast Exchange and creating a single exchange linking the French-speaking

members of the West African Economic and Monetary Union (Benin, Burkina Faso, Cote

D’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo). The growth has not ended. Plans are

in place for new exchanges in countries such as Gambia and Sierra Leone. Most of the

exchanges are of recent vintage, with the exception of exchanges in Kenya (1954), Nigeria

(1960), and much older exchanges in South Africa, Egypt, Morocco and Zimbabwe.

Table 1: List of African Stock Exchanges 2009 Exchange Location Founded

Bourse Régionale des Valeurs Mobilières* Abidjan 1998 Algeria

Bourse des Valeurs Mobilieres d'Alger Algiers 1997

Botswana

Botswana Stock Exchange* Gaborone 1989

Cameroon

Douala Stock Exchange Douala 2001

Cape Verde

Bolsa de Valores de Cabo Verde Praia Egypt

Cairo & Alexandria Stock Exchange* Cairo, Alexandria 1883

Ghana

Ghana Stock Exchange* Accra 1990

Kenya

Nairobi Stock Exchange* Nairobi 1954

Libya Libyan Stock Exchange* Tripoli 2007

Malawi

Malawi Stock Exchange* Blantyre 1995

Mauritius

The Stock Exchange of Mauritius* Port Louis 1988

Morocco

Casablanca Stock Exchange* Casablanca 1929


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Mozambique

Maputo Stock Exchange* Maputo 1999

Namibia

Namibia Stock Exchange* Windhoek 1992

Nigeria Abuja Securities and Commodities Exchange Abuja 2001 Nigerian Stock Exchange* Lagos 1960

Rwanda

Rwanda Over The Counter Exchange Kigali 2008

South Africa

AltX Johannesburg 2003 Bond Exchange of South Africa Johannesburg 1989 JSE Limited* Johannesburg 1887 The South African Futures Exchange Johannesburg 1990

Sudan Sudan Stock Exchange Sudan

Swaziland

Swaziland Stock Exchange* Mbabane 1990

Tanzania

Dar es Salaam Stock Exchange* Dar es Salaam 1998

Tunisia

Bourse de Tunis Tunis 1969

Uganda

Uganda Securities Exchange* Kampala 1997

Zambia

Agricultural Commodities Exchange of Zambia Lusaka Lusaka Stock Exchange* Lusaka 1994

Zimbabwe Zimbabwe Stock Exchange* Harare 1993 Source: www.wikipedia.org,

The dominant impetus for the recent creation of securities exchanges has been the

privatisation programs that have swept across Africa. Privatisation offerings attract a variety

of investors, including domestic and foreign individuals, institutions (such as pension funds,

insurance companies and banks), employee share ownership plans (ESOPs), and collective

investment schemes such as unit trusts and mutual funds. None of such investors would be

attracted to an offering without some assurance that there is a secondary market in which to

dispose of the shares at a later date in order to cash in on market appreciation or to change

investments. This is the requisite element of liquidity. Holders of equity securities have no exit

mechanism for their investment without an established secondary marketplace. The exchanges

provide the resale market, commonly known as a secondary market.


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2.1 Impediments to the Growth of Stock Exchanges in Africa

As noted, the growth of stock exchanges in Africa has been primarily driven by government

privatisation programs. However, there are still some persisting impediments to the

development of stock exchanges experienced unilaterally in the region some of which are

highlighted below:

i. The over-the-counter market is not well developed in sub-Saharan countries. There is, therefore, little or no liquidity for shares not listed on an exchange. Despite the

stated merits of a stock exchange, it must nevertheless be emphasized that a stock

exchange does not ipso facto provide or ensure liquidity. It would be a non sequitur to

conclude that, because an exchange exists and securities are listed thereon, there will

always or even usually be ready and willing buyers whenever there are ready and willing

sellers of securities. A stock exchange is by far the best opportunity for liquidity to occur,

but an exchange is not a guarantee of liquidity.

ii. One of the unfortunate characteristics of most sub-Saharan stock exchanges is that they do not create as liquid a market as one would hope. In other words, there is

often such little trading interest in a listed security that placing a sell order on an

exchange often fails to be met with a matching buy order, and vice versa. Sometimes

there is a dearth of sellers, sometimes a dearth of buyers. Usually there are too few of

either category. In developed, vibrant markets, a shortage of buyers or sellers is usually

a temporary, short-term phenomenon. Market forces cause share prices to rise or fall

based on investor demand, higher if there are more buyers than sellers, lower if more

sellers than buyers. As share prices move up or down, the information is broadly

disseminated to broker-dealers and the investing public. Before long, holders of shares

who are willing to cash in for a profit come forward to sell, or potential buyers who find

the lowering price to be attractive enter the market to buy. Inevitably the price movement

creates trading.

iii. Normal market forces do not seem to operate as easily in African exchanges. One

problem may be the lack of widespread communication facilities, which inhibit the dissemination of knowledge of timely market movements. A second problem is


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much more fundamental; the tendency of many of the newer investors within sub-Saharan countries to view their share holdings as long-term property, not to be sold except for extraordinary circumstances. Additionally, most exchanges have

adopted internal constraints on the price change that a stock might incur in any given

trading period. With very little trading activity, and exchange constraints in place, stocks

are much more likely to remain at a relatively stagnant level rather than drift downward

for want of buying activity, or upward for want of selling activity. Without such movement,

potential sellers or buyers remain on the sidelines.

iv. The lack of significant numbers of listed companies is a major cause of the paucity

of daily trading and the concomitant lack of liquidity within the stock markets. With few

investment options available, it is no wonder that investors do not engage in trading one

security for another, moving in and out of stocks in the manner seen in developed

markets. Ghana is an excellent example of this problem. Although there are 31

companies with securities listed on the Ghana Securities Exchange, only a very few of

those companies experience daily trading activity. The largest company, Ashanti Gold

Mines, is formally listed but does not trade at all on the Ghana exchange, as its shares

are dollar-traded in the United States. In other exchanges, often no more than a handful

of stocks are active, the rest being quite dormant unless major developments occur. The

two fundamental questions of (i) how to attract more listings, especially from privately-owned companies, and (ii) how to develop greater public interest and participation in stock trading are inextricably linked. Privately-held companies do not

find an illiquid market attractive, and until there is more market listings and trading,

public interest is difficult to develop.

v. Beneath all of these problems lies a more basic impediment to stock exchange

development - a lack of public confidence in the integrity of the securities markets.

Throughout sub-Sahara Africa there is a profound distrust of government and centralized

financial institutions. Government corruption is notorious and rampant. But corruption

has not been confined to government offices. Across the continent there has been a

stream (some might suggest a river or torrent) of bank failures, collapse of corporations,

and mismanaged pensioned provident funds. In Kenya for example, the collapse of 3

stock-brokers have severely dented investor confidence. This unfortunate history has

caused many to believe, not without reason, that bedrooms and closets are safer


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repositories of savings than banks and other commercial institutions. Now place into this

historical formula a stock exchange, and it is not difficult to understand that the

exchange is perceived by many as combining the worst of two worlds - government

control and a centralized financial institution.

Building public confidence is central to market development. Without active, continuous public

support and participation, markets will flounder for lack of products and liquidity. With relatively

little trading, downturns can be magnified, as there is a very thin supply of buyers to begin with.

This exacerbates the problem, as even those in the market begin to doubt the wisdom of their

choice and must face the criticism of skeptical family and friends.

2.2 Recent Trends Worldwide that are contributing to the growth of stock exchange development

i. Privatization

Privatization of state owned enterprises is the method being used to achieve such mass

participation. The results have been impressive and hold out promises of rapid and broad based

economic growth for those nations. The exercise will swell the ranks of individual and corporate

shareholders, as it will also hopefully replace the state with new core investors. Information

technology will hopefully be adopted in the stock exchanges and also hopefully modern

depositories will be established to take the burden of share transfers off paper-based registrar

systems and hence speed up securities settlement and delivery in nations with notoriously poor

postal systems.

ii. Distribution and Linkage of Stock Exchanges

Cross border stock exchange alliances have become fashionable. Advances in information

technology have made it increasingly possible for stock exchanges of nations to consider the

formation of alliances to take advantage of economies of scale and permit their investors to

build and enjoy portfolios having greater diversity of securities. These alliances which are still in

their exploratory and formative stages are also to enable investors in one market partake in the

securities in other markets and vice versa.


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iii. Ownership Challenges and Regulations

Recent trends in stock exchange development are combining with advances in technology to

create new operating as well as ownership challenges.

• First is that the cost of setting up a new IT enabled stock exchange is too high for a

number of gentlemen brokers to fund. Nor are their individual or collective personal

guarantees likely to be adequate so that the exchange could be ‘limited by guarantee’. In an economy coming out of mass poverty and in which concentrations of economic

power are few and suspect. It is only the state that would be eligible to set up the stock

exchange or a commercial (demutualized) entity that can be sustainable.

• Second, is that the trading operation of a stock exchange by itself is initially, and until

substantial volumes are achieved, scarcely a profitable activity if the public interest is to

continue to be served.

• Third, and resulting from the foregoing is that the stock exchange is now seen

increasingly for what it really is, namely an essential financial infrastructure for many

economies.

iv. New Role in Economic Growth

It used to be that the role of the stock market in economic development was all but ignored in

economic literature. It is suggested that this may have derived in part from the fact that such

fathers of modern economics as Ricardo and Keynes ignored the stock market in all their

prescriptions notwithstanding that they made fortunes trading on the stock market.

The new view, Robert G King & Ross Levine (1992), places substantial premium on the role of

entrepreneurs, on the role of financial intermediaries in assessing and allocating resources and

in the role of the stock market not only as a signal of performance but also as a barometer of

economic condition and a vehicle for mass mobilization of people and capital for development.

The view is that Growth is predicated on the ability of the entrepreneur to mobilize resources

and to develop intangible human capital. Africa may not have lacked entrepreneurs, but it has


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lacked any kind of market for such entrepreneurs to raise capital except in the informal capital

markets where costs and rates of return are usuriously exorbitant.

However, and a result of the foregoing, stock exchange development in Africa is now being

promoted, not only to enable investors from the developed nations to peacefully participate in

but also being promoted to enable Africans themselves to participate and to enjoy the benefits

of liquid and clean markets.


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CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Sampling

The study proposed to use a theoretical population of all African stock exchanges. However, the

accessible populations are stock exchange members of the African Stock Exchanges

Association, which then formed the sampling frame. The sample used was an unbalanced

selection of 15 African stock exchanges and another 8 exchanges from Asia, the Middle East

and Latin America respectively for benchmarking purposes.

3.2 Measurements

Secondary Analysis of data is applied. The performance measurement indicators include, but

not limited to, Equity Turnover; Share Volume; Share Index/ market capitalization return; Market

capitalization; Bond Turnover; Turnover ratio; Market Capitalization as a percentage of GDP;

Number of listed companies and infrastructure of stock exchanges. These are all defined within

their context in the report.

3.3 Data Collection and Preparation

The study, to a significant extent, relied on data collected from secondary sources, specifically,

internet research. Other sources included, but not limited to, the use of journals and other

scholarly or media publications. Quantitative Data was categorized and documented within an

excel database structure.

3.4 Data Analysis The data is analyzed through descriptive statistics. Univariate analysis is used for analyzing

quantitative data while content analysis has been used in analyzing non-quantitative data. An

error margin of +- 5% has been applied to all sets of unbalanced data where applicable.


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3.5 Findings

Findings are presented in tabular and graphical presentations with the inclusion of analytical

interpretation narratives. An information paper will then be prepared for the purpose of

discussion by the Management and Board of the Capital Markets Authority.

3.6 Validity

As this was not a causal study, internal and conclusion validity were not considered. The

measurements applied to assess the performance of markets are used worldwide hence

constructs are valid. In addition, proposals made based on the analysis of findings are similar to

those made in other studies hence recommendations are externally valid.


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CHAPTER FOUR

4.0 FINDINGS AND ANALYSIS The Analysis is based on evidence from 15 African stock exchanges which represents 65% of

the total population of African Stock Exchanges. It has also taken into consideration the

significance of the following exchanges: Kenya, Ghana, Egypt, Morocco, Nigeria and South

Africa, which constitute of approximately 90% of stock exchange activity in the region. South

Africa alone constitutes of approximately 70% of stock market activity in the region.

4.1 THE STATE OF AFRICAN STOCK MARKETS 4.1.1 Stock Market Size:

I. Market Capitalization: Market capitalization is a measurement of corporate or economic size equal to the share price

times the number of shares outstanding of a public company, providing a total value for the

company's shares and thus for the company as a whole. Market capitalization represents the

public opinion of a company's net worth and is a determining factor in stock valuation. (Note:

market capitalization is a market estimate of a company's value, based on perceived future

prospects, economic and monetary conditions). The table below compares the total stock

market capitalization for various African Stock exchanges over the examination period.

Table 2: Stock Market Capitalization (USD-bn)

2006 2007 2008 2009 % ∆ 2007-

2008% ∆ 2008-

2009Botswana (DC) 4.09 5.44 3.68 4.28 -32.35% 16.30%Egypt 93.35 139.69 85.84 91.21 -38.55% 6.26%Ghana 12.18 12.74 14.91 10.91 17.03% -26.83%Kenya 11.41 13.61 10.98 10.95 -19.32% -0.27%Sudan 4.66 5.18 4.17 NA -19.50% NAMalawi 0.6 1.29 1.79 1.48 38.76% -17.32%Mauritius 3.54 6.04 3.34 4.82 -44.70% 44.31%Morocco 49.32 76.02 60.5 56.4 -20.42% -6.78%Namibia (DC) 1.58 1.74 0.77 0.96 -55.75% 24.68%


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Nigeria 40.32 105.65 80.6 47.75 -23.71% -40.76%South Africa 816.88 836.34 549.2 799.02 -34.33% 45.49%Tanzania 2.44 2.79 3.8 3.57 36.20% -6.05%Tunisia 3.7 4.4 5.6 8.2 27.27% 46.43%Uganda 2.39 3.53 2.87 3.34 -18.70% 16.38%Zambia 3.19 4.83 4.1 5.27 -15.11% 28.54%TOTAL AFRICA 1050.15 1219.84 832.44 1048.16 -31.76% 25.91%AVERAGE AFRICA -14.20% -2.57%WFE8 Total MCAP 50,650 60,855 32,584 46,525 % of AMCAP to WFW Total 2.38% 2.29% 2.79% 2.21%

Av. % ∆ in WFE Members -86.76% 29.96%

Emerging Markets 2006 2007 2008 2009 % ∆ 2007-

2008% ∆ 2008-

2009Buenos Aires SE 51.24 57.07 39.85 45.75 -30.17% 14.81%Bursa Malaysia 235.58 325.29 189.24 286.16 -41.82% 51.22%Bombay SE 818.88 1819.1 647.2 1306.5 -64.42% 101.87%Taiwan SE 594.66 663.72 356.71 657.61 -46.26% 84.35%Istanbul SE 162.4 286.57 234 118.33 -18.34% -49.43%Amman SE 29.73 41.22 31.83 35.9 -22.78% 12.79%Singapore SE 384.29 539.18 481.25 264.97 -10.74% -44.94%South Korea 834.4 1122.61 834.59 470.8 -25.66% -43.59%

Source of Data: CMA Database;*Zimbabwe figures used for analysis are for 2006, before currency revaluation: DC –

Domestic Company market Capitalization

As at December 2009, the WFE total market capitalization was US$46.5 trillion. African stock

market capitalization accounted for a meager 2% during the period under review. In 2008, only

Ghana, Malawi, Tanzania and Tunisia registered an increase in market capitalization. However,

market performance improved in 2009 with a majority of stock markets posting a positive capital

appreciation with the exception of a few including Kenya, Nigeria and Ghana. Year on Year, the

most significant improvements were registered by the JSE and Namibian Stock Exchange while

Ghana and Malawi registered declining results. The NSE improved marginally. In 2008, Malawi

Stock exchange registered the best performance while South Africa and Tunisia took the honors

in 2009. Market Concentration of the 5 largest exchanges in Africa is 95%. The data above

indicates that the Nairobi Stock Exchange, as at December 2009, was ranked 5th in Africa in

terms of market capitalization behind South Africa, Egypt, Nigeria and Morocco9. Ghana ranks

in at a close 6th. It will suffice to note that the Market Capitalization figures of Namibia and

Botswana only include the Domestic Listed Components. This is because the two exchnages

8 World Federation of Exchanges 9 It would suffice to note that Mcap figures of Botswana and Namibia only represent locally listed companies leaving out the foreign component which ensures comparability of data.


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both have domestic and foreign boards. In this regard, inclusion of the M-Cap of the foreign

board will make them rank 2nd and 3rd respectively in Africa.

II. Number of Listed Companies:

Table 3: Number of Listed Companies

2006 2007 2008 2009 %∆ 2008-2009 Botswana 18 30 31 31 0.00% Cote d'Ivoire 40 40 40 40 0.00% Egypt 595 435 373 313 -16.09% Ghana 32 32 35 35 0.00% Kenya 52 54 56 55 -1.79% Mauritius 41 41 40 40 0.00% Malawi 11 13 15 15 0.00% Morocco 63 73 73 73 0.00% Namibia 28 27 29 29 0.00% Nigeria 202 212 213 216 1.41% South Africa 401 422 425 396 -6.82% Swaziland 6 6 5 5 0.00% Tanzania 10 10 14 15 7.14% Tunisia 48 48 50 52 4.00% Uganda 11 12 13 13 0.00% Zambia 16 17 19 21 10.53% Zimbabwe 83 85 90 96 6.67% Sudan 51 53 53 53 0.00% Mozambique 5 7 6 6 0.00% Libya 4 6 6 6 0.00% AFRICA TOTAL 1,717 1,623 1,586 1,510 -4.79% AFRICA MEAN 85.85 81.15 79.30 75.50 AFRICA MEDIAN 36 36 37.5 37.5 AFRICA % OF WFE 3.80% 3.49% 3.46% 3.33% WFE TOTAL 45,211 46,509 45,846 45,358 -1.06% EMERGING MARKETS Malaysia 1020 1027 976 959 -1.74% Mexico 151 131 373 406 8.85% Thailand 518 523 525 535 1.90% Chile 246 244 238 236 -0.84% Bombay SE 4796 4887 4921 4,955 0.69% Argentina 106 111 112 106 -5.36%

Source of Data: International Financial Statistics (IMF); Emerging Markets Database (IMF); Table adapted from Senbet & Otchere

(2008).

On the global front, African stock markets accounted for approximately 3% of listed companies

as at end of 2009. In this particular year, the net effect of new listings and de-listings was -76

companies. The number of listed companies on African stock exchanges is also small

compared to other emerging markets as seen in the table above. As of 2009, the mean number

of firms listed on African Stock Markets is 75 as compared to 959 and 4,955 in Malaysia and


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India respectively. The number of firms listed has declined over 2006-2009 (growth rate of -4%)

with the well established markets of South Africa and Egypt recording significant drops in the

number of firms listed.

The JSE has the highest number of listings on the continent numbering 396 and accounting for

approximately 26% of the total number of listings in African stock exchanges. The Egyptian

Exchange follows with 313 listings (21%) and Nigeria with 216 listings (14%). Kenya ranks 6th in

this indicator of stock market size behind South Africa, Egypt, Nigeria, Morocco and Zimbabwe.

Consequently, the top six stock exchanges in the continent with regards to number of listings

account for 76% of the total listings on African stock exchanges while the top three exchanges

account for 61% of total listings. Chart 1: Number of Listed Companies

III. Market Capitalization as a %age of GDP:

Generally, this ratio is used to determine whether an overall market is undervalued or

overvalued. It is calculated as:


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The result of this calculation is the %age of GDP that represents stock market value. Typically,

a result of greater than 100% is said to show that the market is overvalued, while a value of

around 50%, which is near the historical average for the U.S. market, is said to show

undervaluation10. However, it is also a measure of stock market size relative to GDP. This paper

uses the latter.

Table 4: Market Capitalization of Listed Companies (% of GDP)

COUNTRY 2006 2007 2008 2009Mean (2006-2009)

% Cumulative Growth (2006-2009)

Botswana 28.4 39.93 40.7 36.8 31.86 132.47%Egypt 72 86 53 48.53 55.37 68.57%Ghana 97 96 109 70.39 60.88 596.93%Kenya 50.09 49.34 31.81 33.49 31.09 231.58%Mauritius 78.5 96.5 56 54.59 54.18 83.25%Morocco 86.13 71.91 96.75 62.1 59.22 89.91%Namibia 22.76 25.24 14.69 10.15 14.15 11.29%Nigeria 28.1 58.2 41.9 29.5 27.75 220.30%South Africa 280.41 303.01 NA 278.18 211.67 80.36%Tanzania 17.18 15.06 21.69 16 11.22 522.57%Tunisia 14.68 14.1 NA 20.41 12.74 40.37%Uganda 22.38 30.2 24.85 21.22 13.65 3322.58%Zambia 45 47.99 56.72 38.77 26.36 432.55%Malawi 35.47 48.65 44.83 38.44 18.6 8.37%Africa - Mean 37.89 Africa - ex S.Africa 28.75 Africa - Median 51.9 Emerging Markets Buenos Aires SE 14.75%Bursa Malaysia 149.46%Bombay SE 105.71%Taiwan SE 173.53%Istanbul SE 19.23%Amman SE 156.56%Singapore SE 149.59%

10 However, determining what % level is accurate in showing undervaluation and overvaluation has been hotly debated.


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South Korea 56.55%Source of Data: International Financial Statistics (IMF); Emerging Markets Database (IMF); Table adapted from Senbet & Otchere

(2008).

The mean market capitalization (as a %age of GDP) of 37.89% (28.75% excluding S.Africa)

pales in comparison to that of Malaysia of 149.46% but comparable to that of Turkey, Argentina

and South Korea. The size of the markets has, however been growing, with the mean for Africa

growing from 17% of GDP in 1991 to 38% in 2009. South Africa leads the pack with an average

market capitalization to GDP ratio of 211.67%. This is then followed by Ghana (60.88%);

Morocco (59.22%); Egypt (55.37%); Mauritius (54.59%); Botswana (31.86) and Kenya at 31%,

ranking it 7th in this measure. However, as highlighted earlier, Zimbabwe’s figures are grossly

inflated and as such are not suitable for comparison using this indicator.

Table 5: Nominal GDP (USD Bn) 2008 - 2009

COUNTRY 2008 2009 Botswana 12.97 11.63 Egypt 162.82 187.95 Ghana 16.12 15.5 Kenya 34.51 32.7 Sudan 58.44 54.68 Malawi 4.27 4.57 Mauritius 8.65 8.76 Morocco 86.33 90.82 Namibia 8.56 9.46 Nigeria 212.08 173.43 South Africa 276.76 287.23 Mozambique 9.74 9.83 Swaziland 2.62 2.98 Tanzania 20.49 22.31 Tunisia 40.18 40.17 Uganda 14.53 15.74 Zambia 14.31 13 EMERGING MARKETS Argentina 328.39 310.07 Malaysia 194.93 191.46 India 1,217,490 1235.98 Taiwan NA 378.97 Turkey 794.2 615.33 Jordan 20.01 22.93 Singapore 181.95 177.13 South Korea 929.12 832.51

Source: IMF; www.wikipedia.org


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Among other factors, the high market cap-to-GDP ratio for some countries is mainly due to two

reasons:

i. The listing of foreign companies locally, especially in S.Africa, Botswana and Namibia

ii. The expansion of Local companies into overseas countries/stock markets.

This implies that listed companies in the stock market are effectively serving more than one

economy. In addition, having substantial investments in other jurisdictions ensures a substantial

source of revenues from abroad. In other words, the large market capitalization of these

companies does not necessarily have a direct relationship with the GDP of the country of origin.

Some common characteristics of the markets with high market capitalization to GDP ratio are

that they:

i. serve as regional financial hubs, which attract listing of overseas companies;

ii. have domestic companies with significant regional and international business;

iii. have a sound legal framework and a relatively developed economy; and

iv. Possess a domestic economy of relatively small size (i.e. their economies are globally

integrated)


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Chart 2: Mean Market Capitalization as a % of GDP (2009)

4.1.2 Liquidity of African Capital Markets:

Beyond mere capitalization, it is the functional efficiency of the stock markets that contributes

significantly to economic growth. African stock markets, thus, should be assessed on the basis

of their efficiency in carrying out their functions. Although the growth in the number of stock


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exchanges has been impressive, their existence alone is not complementary to economic

growth. Except for the S.African stock market, pre-emerging markets in Africa are by far the

smallest of any region, both in terms of number of listed companies and market capitalization.

Moreover, trading activity is minimal. In most African stock markets, trading is concentrated in

only a few stocks. These stocks themselves account for a considerable part of the total

capitalization of the entire market. In this regard, we analyze turnover and volumes to measure

general liquidity and turnover ratios to measure operational efficiency in these markets that

facilitate and enhance ease of completing stock market transactions.

I. Turnover:

This indicator refers to the value of shares traded on a stock exchange during a day, month, or

year. It is calculated by multiplying the number of shares traded (share volume) at the exchange

with their respective values (prices). Turnover is a stock market liquidity indicator and it

measures stock market trading relative to the size of the market.

Table 5: Market Turnover/Value Traded (USD mn)

COUNTRY 2007 2008 2009 % OF TOTAL TO (2008)

Ghana 144.90 316.69 50.80 0.06% Uganda 39.80 41.92 9.20 0.01% Egypt 66,008.00 96,825.00 73,474.06 17.49% Morocco 40,766.00 25,600.00 NA 4.62% Kenya 1,417.02 1,250.00 502.2 0.23% Malawi 37.00 59.70 20.31 0.01% Mauritius 445.96 437.42 333.56 0.08% Namibia 1,536.66 1,008.00 1,051.56 0.18% Nigeria 16,600.00 20,010.00 4,700.00 3.61% S.Africa 1,144,964.00 395,235.21 335,863.73 71.39% Botswana 137.53 155.06 110.68 0.03% Zambia 72.36 167.84 43.78 0.03% Tanzania 26.22 25.73 34.50 0.00% Sudan 899.80 939.59 NA 0.17% Tunisia 1,179.30 2,792.60 NA 0.50% AFRICA TOTAL 1,283,007.58 553,603.79 % of AFRICA TOTAL TO WFE TOTAL 0.01% 0.005%

EMERGING MARKETS % OF WFE TOTAL TO

Buenos Aires SE 7,382.53 6,616.70 2,993.70 0.01% Bursa Malaysia 169,722.83 93,557.40 86,032.60 0.08% Bombay SE 343,775.81 301,648.29 263,352.14 0.27% Taiwan SE 1,010,064.72 830,086.67 905,130.69 0.73% Istanbul SE 294,294.96 247,893.07 301,127.73 0.22% Amman SE 17,427.08 28,690.07 13,646.72 0.03%


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Singapore SE 381,288.68 259,885.03 245,425.37 0.23% South Korea 2,005,993.75 1,432,479.94 1,559,039.91 1.26% WFE TOTAL (USD BN) 112,969 113 ,258 80 ,455


(2008).

The table above analyses stock market turnover for various African stock exchanges for the

period 2007-2009. As of 2008, the analysis suggests that the most actively traded market in

Africa is South Africa, accounting for over 70% of the entire African stock exchanges turnover.

This makes it the most liquid stock market in Africa. Egypt, Morocco and Nigeria account for

17%, 4%, and 3% respectively. Tunisia (0.5%) and Kenya (0.2%) rank 5th and 6th respectively.

The global equities turnover was approximately USD 113 trillion in 200811 making Africa’s

contribution to this figure stand at approximately 0.005%.

II. Volume:

Volume measures market liquidity by counting the number of shares that are traded for a given

security over a given time period. Volume data is recorded for individual stocks, exchange

traded funds (ETFs), options, and for indices as a whole. Volume reflects the supply and

demand for stocks. A stock with low volume is said to be illiquid.

Theoretically, low volume means that the market is illiquid (reflects a lack of selling/buying

"urgency in the market). It also implies high price volatility.12On the other hand, high volume

usually implies that the market is highly liquid, resulting in low price variability. This also reduces

the price effect of large trades. In general, with an increase in volume, broker revenues will

increase and market makers have a greater opportunity for profit as a result of higher turnover.

Volume is also an indication of the ease of trading within the market.

Table 6: Volume Traded (USD mn)

COUNTRY 2006 2007 2008 2009 % of Total 2008

Botswana 87.25 124.89 192.71 167.59 0.06% Egypt 9,082.00 15,091.00 25,489.63 28,576.98 8.15% Ghana 98.29 287.22 545.79 97.00 0.17% Kenya 1,454.67 1,938.20 5,860.00 3,169.12 1.87% Sudan 7,567.78 9,411.56 289.01 NA 0.09% Malawi 160.57 359.52 607.53 592.42 0.19% Mauritius 250.79 300.80 318.68 NA 0.10%

11 WFE Annual report, 2009. 12 According to Telsar (1981)


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Morocco 178.78 211.98 156.67 400.10 0.05% Namibia 234.59 242.60 291.76 342.97 0.09% Nigeria 36,700.00 138,100.00 193,140.00 102,850.00 61.78% S.Africa 74,565.40 71,199.80 83,780.00 80,977.85 26.80% Tanzania 23.09 30.27 26.98 121.30 0.01% Uganda 15.49 484.13 216.93 123.23 0.07% Zambia 858.66 1,472.52 1,527.80 875.01 0.49% Tunisia NA NA 158.24 189.34 0.05% Africa Total 139,216.97 247,896.50 312,605.16 Africa Mean (2003-2008) 147,209.30 Africa Median 105,465.56

WFE TOTAL (Bn)

16,445.00

23,757.00

29,500.00

46,446.00 % of African Total to WFE total 0.01% 0.01% 0.01% EMERGING MARKETS

Buenos Aires SE

3,302.26

5,221.81

4,487.00

4,040.60

Bursa Malaysia

284,820.69 NA

154,476.00

248,061.00

Bombay SE

54,162.40

91,571.81

80,462.90

105,777.30

Taiwan SE 737868.309

898,238.39

783,176.21

1,098,295.96

Istanbul SE

4,104.30

4,479.36

114,307.71

205,303.77

Amman SE

91,197.98

116,344.64

5,442.27

6,022.47

Singapore SE

260,515.97

574,108.70

260,654.66

423,862.20

South Korea

202,882.84

240,224.91

212,946.50

319,472.00 Source of Data: International Financial Statistics (IMF); Emerging Markets Database (IMF); Table adapted from Senbet & Otchere

(2008).

From the analysis, stock market volume has been dominated by Nigeria of which accounts for

61% of total African stock exchanges share volume in 2008. This is followed by South Africa

(26%); Egypt (8%); and Kenya (1%). Kenya is ranked 4th in this indicator. The top four

exchanges account for approximately 98% of total share volume with the top two accounting for

88% of total share volume. The same trend is observed in 2009 though analysis was based on

2008 data due to the unbalanced set of 2009 indicators.

a. Operational Efficiency in enhancing Liquidity:

We use standard approaches in measuring indicators of functional efficiency in liquidity of

African stock markets of which are highlighted below:


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1. The ratio of total value of shares traded on the exchange to GDP. This indicator

measures the market’s trading activity relative to the size of the economy;

2. The ratio of total value of shares traded to the total capitalization of the market. This

indicator is known as “turnover ratio”, and it measures the market’s overall trading

activity relative to the size of the market itself.

These indicators do not directly measure the stock market liquidity in the sense of the ease at

which investors can buy and sell securities at posted prices, but they are rough measures of the

overall trading activity relative to the size of both the economy and the stock market.

III. Turnover Ratio (Stock market Turnover as a % of Market Capitalization)

The turnover ratio — the value of shares traded as a %age of market capitalization. Turnover

ratio measures trading activity relative to size of the market. A higher turnover ratio implies

higher demand for securities and as such higher generation of revenues in terms of transaction

costs.

Table 7: Turnover Ratio (Turnover as a % of Market Capitalization)

COUNTRY 2006 2007 2008 2009Mean 2006-

2008 Botswana 1.76 2.88 3.86 2.68 2.83 Egypt 48.7 38.73 37.4 73.9 41.61 Ghana 0.42 1.14 2.1 NA 1.22 Kenya 11.54 10.41 11.42 5 11.12 Mauritius 4.14 5.74 9.66 6.93 6.51 Morocco 61.36 61.36 NA NA 40.91 Namibia 0.63 0.98 1.38 NA 1.00 Nigeria 14.7 28.21 21.86 13.26 21.59 South Africa 42.08 52.31 71.84 40.4 55.41 Tanzania 0.67 0.94 0.68 NA 0.76 Tunisia 15.24 13.2 NA NA 9.48 Uganda 0.25 1.42 1.81 NA 1.16 Zambia 3 1.55 0.66 NA 1.74 Sudan 10 12.3 5 NA 9.10 Malawi 2.33 2.86 3.34 1.33 2.84 Mozambique 1.86 1.16 3.3 NA 2.11 Africa Mean 11.85 14.96 12.45 NA 13.09 WFE Mean 78.6 90.3 98.5 78.40% 89.13 Africa-Median 3.34 2.88 3.86 NA 3.36 EMERGING MARKETS Buenos Aires SE 7.2 8.9 3 3.6 6.37


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Bursa Malaysia 36.2 57.1 20.3 23.9 37.87 Bombay SE 31.9 29.4 30.9 19.4 30.73 Taiwan SE 141.7 153.3 141.7 168.1 145.57 Istanbul SE 141.3 129.7 110.9 165.6 127.30 Amman SE NA 38.1 23.5 34.8 20.53 Singapore SE 58.2 77.6 48.9 46.1 61.57 South Korea 171.4 192.6 261.2 149 208.40


(2008).

The mean turnover ratio for African stock exchanges for the period under analysis was 13.09%.

The markets that registered a higher mean turnover ratio than the African average were: South

Africa (55%); Egypt (41%); Morocco (*40%); Nigeria (21%); Kenya, ranked 5th in this parameter,

registered a mean turnover ratio of 11% for the period under analysis.

The relatively low turnover ratio for most markets could be partly due to the fact that there

exists’ a strong trading interest from institutional investors. In addition, high turnover ratios could

also be explained by the fact that a significant portion of the shares in these exchanges were

held by families or strategic investors. Therefore, the actual free float of shares available for

trading in these exchanges is much lower. In contrast, where the market is characterized by a

relatively large pool of active retail investors trading turnover ratios for shares are much higher.

This phenomenon could be evidenced in the Kenyan stock market, where institutional investors

(including foreign investors) hold significant chunks of listed companies (75%) and the free float

of shares available to other investors is extremely thin at (25%), of which a huge chunk is

hoarded by very few shareholders, consequently, exposing the market to speculative

tendencies and market manipulation13.

13 A survey on investor profiles at the Nairobi stock exchange (2007) found that over 70% of the available free float was in the hands of 20 % of shareholders i.e. corporate & HNW individuals


46 | P a g e

Chart 3: Mean Turnover as a % of Market Capitalization (2000-2007)

IV. Turnover as a %age of GDP:

This is basically a measure of stock market activity in relation to economic activity. This ratio

does not directly measure the costs of buying and selling securities at posted prices. Yet,

averaged over a long time, the value of equity transactions as a share of national output is likely


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to vary with the ease of trading. In other words, if it is very costly or risky to trade, there will not

be much trading.

Table 8: Turnover as a % of GDP

COUNTRY 2007 2008 % ∆ 2007‐2008 Botswana 0.9 0.6 -33%Egypt 41.4 57.57 39%Ghana 0.7 2.26 223%Kenya 4.5 3.62 -20%Mauritius 5.12 5.42 6%Morocco 41.9 29.65 -29%Namibia 3.7 18.74 406%Nigeria 28.2 7.79 -72%South Africa 52.5 63.1 20%Tanzania 0.1 0.15 50%Uganda 0.1 0.45 350%Zambia 0.6 1.55 158%Africa Mean 14.98 15.91 6%Africa Median 4.5 5.42 20%WFE Mean 96.6 101.5 5%EMERGING MARKETS Buenos Aires SE 8.9 7 -21%Bursa Malaysia 57.1 36 -37%Bombay SE 29.4 29 -1%Taiwan SE 153.3 145.5 -5%Istanbul SE 129.7 135.1 4%Amman SE 42.3 59.1 40%Singapore SE 77.6 63.7 -18%South Korea 196.3 192.6 -2%


(2008).

South Africa ranks first in Africa in this indicator registering a mean turnover to GDP ratio of

63% in 2008. This is then followed by Egypt (57%); Morocco (29%); Namibia (18%); Nigeria

(7%); Mauritius (5%) and Kenya (3%). Kenya was ranked 7th in the continent.


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Chart 4: Mean Turnover as a % of GDP (2008)

Table 7 and 8 above show that indicators of stock market development via trading activity

measures are small implying that most stock markets are characterized by low provision of

liquidity and exit strategies. The low liquidity (rather illiquidity), more than market capitalization,

should be of great concern to Africa in light of empirical evidence which suggests market

liquidity as a vital channel for linking stock market development with economic performance.

There a number of potential impediments to liquidity of African stock markets including, but not

limited to, the following:

• Institutional investors, as well as Governments maintaining minority holdings, are not

active traders in secondary markets.

• Markets tend to be dominated by a few large companies e.g. 5 companies account for

75% of transactions in Abidjan; Ashanti Goldfields accounts for 90% of total

capitalization in the Ghana stock market; Safaricom Ltd accounting for over 65% of

turnover in Kenya’s stock market).


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For sure, African stock markets are still small and have low trading activity, but they are

experiencing rapid improvement both in capitalization (size) and liquidity. These developments

have been in response to improvements in regulatory and economic environments that the

region has experienced over the recent past. Simultaneously, foreign participation is also

growing, and Africa is marching to an emerging markets club.

4.1.3 Returns in African Capital Markets:

I. Annualized Index Returns: In index returns, African capital markets have continued to perform incredibly well despite their

numerous challenges. Average annual returns to African equity markets in dollar terms have

averaged 14% over the last 12 years from January 1995 to December 2004, relative to 8% for

South Africa; 6.3% for G7 countries; and 6.6% for the Global equities markets14.

For the period 2007-2009, annualized dollar index returns in African capital markets have been

greatly affected with only Ghana, Tanzania, Tunisia and Zambia registering positive returns for

the 3 year period. In 2008, Ghana stock exchange registered the highest dollar index return in

Africa registering an increase of 58%. Other markets that registered positive growth in Africa

during this period were Malawi (26%); Tanzania (21%); Tunisia (11%) and Zambia (18%). The

Egyptian and Nigerian Stock Exchanges were the worst performing markets during the period

under review registering decreases of -56% and -46% respectively. Kenya was the 5th worst

performing market during the review period registering an index decrease of -35%. However, in

2009, market performance registered significant improvement with most markets registering

positive returns. Tunisia was the best performing market in Africa registering an index increase

of 48%. Other significant increases were observed in South Africa, Mauritius, Namibia, Zambia,

and Egypt stock exchanges. Kenya continued to register negative growth as the index declined

by 8% during the period.

14 African Business Research Ltd; ASEA conference, 2007.


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Table 9: Annualized Index Returns (2006-2009)

COUNTRY INDEX 2006 2007 2008 2009

2007-2008 Returns

2008-2009 Returns

Annualized Index Returns 2007-2009)

Botswana DCI 6,195.45 8,421.63 7,035.50 7,241.89 -16% 3% -15% Egypt EGX 30 Index 6,973.41 10,549.74 4,596.49 6,208.77 -56% 35% -39%

Ghana GSE ASI 5,006.02 6,599.77 10,431.64 NA 58% 8%

Kenya NSE 20 Share

Index 5,645.65 5,444.83 3,521.18 3,247.44 -35% -8%

-39% NASI NA 100.00 73.37 71.64 -27% -2% -28%

Mauritius SEMDEX 1,204.46 1,852.21 1,182.74 1,660.87 -36% 40% -16% Malawi MASI 2,310.67 4,849.79 6,091.15 5,154.95 26% -15% 18%

Morocco MASI 9,479.45 12,694.97 10,984.29 10,443.81 -13% -5% -16%

Namibia NSX Overall

Index 828.44 929.41 556.26 771.91 -40% 39%

-21% Nigeria NSE ASI 33,189.30 57,990.22 31,450.78 NA -46% -96%

South Africa FTSE/JSE ASI 24,915.20 28,957.97 21,348.45 27,666.45 -26% 30% -11% Sudan Khartoum Index 2,972.76 2,962.10 2,745.85 -7% -57%

Tanzania DSEI NA 1,022.50 1,239.93 1,192.37 21% -4% 19% Tunisia TUNINDEX 2,331.05 2,614.07 2,892.40 4,291.72 11% 48% 35% Uganda USE ASI 849.75 991.12 779.25 732.53 -21% -6% -24% Zambia LASI 1,249.02 2,114.83 2,505.88 2,794.89 18% 12% 24%

EMERGING MARKETS

Buenos Aires SE General Index NA NA 3,416.99 2,072.40

-39%Bursa Malaysia FBM EMAS NA NA 5,726.46 8,507.61 49%

Bombay SE BSE-500 Index NA NA 3,596.85 6,842.25 90%Taiwan SE TAIEX NA NA 4,591.22 8,188.11 78%

Istanbul SE ISE National 100 NA NA 26,864.07 52,825.02 97%Amman SE ASE Index 100 NA NA 2,758.44 2,533.54 -8%

Singapore SE FTSE Straits Times Index NA NA 1,761.56 2,897.62

64%South Korea KOSPI NA NA 1,124.47 1,682.77 50%

Source: WFE Database; ASEA year book 2007-2008


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Chart 5: Annual returns to African equity markets 2007-2009

Source: World Federation of Exchanges

II. Annualized growth in Market Capitalization:

On the Annualized %age growth of market capitalization, (this indicator measures

growth/accumulation of investors wealth in the stock market and is measured in %age terms)

the mean for Africa was 52.4% over the last eight years (2000-2007). However, this figure was

influenced heavily by Zimbabwe’s figures for 2005/2006. Excluding Zimbabwe, the mean

annualized growth in Market Capitalization for Africa was 31%. Kenya’s stock market registered

an annualized Market Capitalization return of 40% over the last eight years. These returns rank

Kenya 4th in Africa outperformed only by Uganda (370.45%), Nigeria (41.99%) and Ghana

(59.2%).

During the period under review, average annualized percentage growth of market capitalization

registered mixed performance. In 2008, only three markets registered positive performance in

this indicator namely; Tanzania (36%), Tunisia (27%) and Ghana (17%). However, there was a

marked improvement in 2009, with only 5 African markets registering negative growth. These


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included Nigeria (-41%), Ghana (-27%), Malawi (-17%), Morocco (-7%) and Tanzania (-6%).

The Nairobi stock exchange just recovered its pre-crisis market capitalization levels without any

significant increase in accumulated investor wealth during the period under review.

Table 9: Average Annualized % Growth of Market Capitalization (2007-2009)

COUNTRY 2007-2008 2008-2009 Botswana -32% 16% Egypt -39% 6% Ghana 17% -27% Kenya -19% 0% Sudan -19%Malawi 39% -17% Mauritius -45% 44% Morocco -20% -7% Namibia -56% 25% Nigeria -24% -41% South Africa -34% 45% Tanzania 36% -6% Tunisia 27% 46% Uganda -19% 16% Zambia -15% 29% Total Africa -32% 26% Average Africa -14% -3% EMERGING MARKETS Buenos Aires SE -30% 15% Bursa Malaysia -42% 51% Bombay SE -64% 102% Taiwan SE -46% 84% Istanbul SE -18% -49% Amman SE -23% 13% Singapore SE -11% -45% South Korea -26% -44%

Source of Data: International Financial Statistics (IMF); Emerging Markets Database (IMF); ASEA; WFE


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Chart 9: Average Annualized Growth in Market Capitalization (2007-2009)

4.1.4 Factors Behind Africa’s Performance

The African continent has been hammered, similar to other parts of the world, by the global

financial crisis, which began with the collapse of the Housing market in the United States and

has further deepened towards the end of 2008, causing many countries to enter into a

recession. The shock waves have reached our countries in the region, hitting key drivers of

growth, in particular trade flows, capital and investment inflows, natural resource sectors and

exports.


54 | P a g e

The global economic downturn has indeed presented significant challenges for world stock

markets. The majority of African exchanges, in particular those linked to the world markets,

were hard hit by the crisis and have actually suffered one of the worst market declines in 2008,

posting annualized losses on their indices ranging from 56% to 7%. Three markets; Ghana,

Tunisia and Zambia Stock Exchanges, have, however, managed to realize gains on their

indices. African exchanges have however concluded the year with an aggregate market

capitalization of US$ 1,048 billion, up from US$ 832 billion recorded in 2008. Capital Withdrawal

from the market by foreign portfolio investors created excess supply of shares in the market with

less demand of the same hence a sharp decline in the prices of most of the exchanges.

In addition, strategies implemented by world economies to mitigate the effects of the crisis had

an impact on relative interest rates and affected portfolio flows. Market correction was hoisted

by the tightening of liquidity in the banking sector arising from the decline in public sector

spending and excess supply of stocks necessitated by profit taking by investors. Despite the

declines in key market indicators, the fundamentals of the stock markets remained strong as

indicated by strong corporate earnings and growth potentials. Going forward the stock markets

has exhibited some signs of recovery. However, investors are still being ruled by cautious

optimism while studying the effect of the global financial crisis on the domestic market.

Despite the global turmoil and the poor markets' performance for the period 2007-2009, African

exchanges continue to focus on the development of the operational infrastructure as well as the

regulatory framework of their markets, to secure an efficient and transparent market, while

promoting stronger corporate governance practices. Experiencing the global financial crisis and

monitoring its effects on our continent and the action plans and development strategies of the

African markets, is raising poise that this is an exciting opportunity and a real chance for Africa

to be more engaged in the global financial system, realizing our capacity as an attractive

investment destination and one of the best world performers in terms of return on portfolio

investment.


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4.2 THE STATE OF AFRICAN BOND MARKETS

Bond market development in Africa has been on the rise with several countries, albeit them

being small and inactive, establishing these markets. Critical factors undermining the

development of bond markets in Africa include, but not limited to:

• Lack of institutional and operating infrastructure

• Low levels of liquidity

• Narrow investor base

• Narrow issuer base

• Short Maturities

• High borrowing costs

4.2.1 Liquidity of African Bond Markets:

I. Turnover: Bond turnover refers to the value of bonds traded between a given time period. It is a measure

of the liquidity (level of trading activity) in the market. Below is a table outlining bond turnover for

specific African countries for the period 2006-2009.

Table 11: Total Value of Bonds Traded in USD-mn (2006-2008)

COUNTRY 2006 2007 2008 2009 % of Total TO (2008)

SA 2,010,740.00 2,296,330.00 2,329,820.89 1,612,156.56 96.42% Botswana NA 30.34 73.23 NA 0.00% Morocco 321.97 373.22 256.00 NA 0.01% Egypt 1,940.00 4,360.00 3,676.80 7,312.39 0.15% Ghana 355.82 2,769.56 0.17 NA 0.00% Sudan 399.90 534.30 450.00 NA 0.02% Kenya 673.72 1,357.23 1,230.00 1,480.00 0.05% Sudan 399.90 534.30 703.35 NA 0.03% Namibia 148.79 157.07 65.75 170.12 0.00% Nigeria 4,930.00 35,410.00 79,570.00 NA 3.29% Mozambique 5.57 3.46 13.31 NA 0.00% Mauritius 0.41 3.73 0.15 NA 0.00% Uganda 36.52 467.52 461.13 NA 0.02% Tanzania 42.91 NA 36.54 78.50 0.00% Zambia 33.88 18.80 1.18 9.90 0.00% TOTAL 2,020,029.39 2,342,349.53 2,416,358.50 EMERGING MARKETS

Buenos Aires SE 27,353.27 47,676.29

54,912.62

21,412.72


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Bursa Malaysia 350.60 1,606.28

677.84

384.41

Bombay SE 612.47 436.70

4,609.74

10,680.56

Istanbul SE 466,651.36 405,044.97

390,081.60

401,042.36

Amman SE 2.70 5.40

0.86

3.59

Singapore SE 9,318.62 19,552.65 15,014.08 7,833.45

South Korea 305,146.85 380,954.02

335,925.96

401,773.07

WFE TOTAL (USD BN) 70, 035 112, 969 113 ,258 80 ,455 Source: CMA Database

The largest bond exchange in the continent is the Bond Exchange of South Africa accounting

for 96% bond turnover in the continent. The rest of Africa’s bond markets numbers are simply

negligible. In 2008, the total value of bonds traded (in USD bn) stood at USD 2,416 bn. When

compared to global bond markets, Africa accounted for 2% of global bond turnover15.

II. Turnover as a % of GDP:

This indicator generally measures the trading activity of the bond market relative to economic

activity. It is a measure that implies the level of bond market contribution (significance) in that

particular economy. The table below analyses this ratio for the period 2003-2007 for selected

African countries.

Table 12: Bond Turnover as a % GDP

COUNTRY 2006 2007 2008 SA 779.35 809.41 842.60 Botswana 0.00 0.00 0.28 Morocco 0.00 0.00 0.00 Egypt 1.81 3.34 2.18 Ghana 3.33 20.67 0.00 Sudan 1.10 1.16 1.30 Kenya 2.96 4.92 3.64 Namibia 2.15 2.27 1.22 Nigeria 2.69 14.75 30.99 Mauritius 0.01 0.05 0.00 Uganda 0.34 3.98 4.00 Zambia 0.00 0.00 0.01 Tanzania 0.30 0 0.21

Source: CMA Database

15 IMF


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Table 13: Comparative BTO as a % of GDP

2006 2007 2008

Kenya 2.96 4.92 3.64

Egypt 1.81 3.34 2.18

South Africa 779.36 809.41 842.60

India 4.98 5.49 9.94

Malaysia 0.23 5.49 0.17

Srilanka 0.02 0.02 0.00

Canada 0.38 0.33 0.31

The same trend is observed as indicated earlier. South Africa’s bond market turnover is 8 times

the size of its GDP with other African markets having marginal bond market activity when

compared with broader economic activity. The analysis indicates that African bond markets

have not yet been efficiently and effectively tapped with regards to unleashing their enormous

potential in deepening capital markets as well as contributing to economic growth. This should

be an area of special focus for policy makers in stimulating and sustaining their development.

4.2.2 The effect of the global financial crisis on African bond markets

Bond Markets in Africa, as emerging and frontier markets, were fairly sheltered from the debris

of this storm during the period under review. The turmoil in the global financial markets did,

however, have some impact on the domestic economy. As a result, the expansion of the local

primary bond markets came under pressure particularly towards the latter part of 2008, owing to

a combination of increased risk aversion and higher debt spreads. A slowdown in listings was

also observed in majority of the markets specifically South Africa and Egypt. However, Kenya

registered an increase in corporate bond listings. The slowdown in listings growth was affected

primarily by contractions in the categories of securitisations and other corporates such as

mining, insurance, food, telecommunications, transport companies and health but excluding

banks.

The level of short-term borrowing in the form of commercial paper showed a slight increase,

while medium term borrowing registered significant increase particularly in Q3 and Q4 of 2009

as corporates became more inclined towards these instruments in the wake of the negative


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sentiments filtering down to the local financial markets. In addition, issuance by government and

state-owned enterprises propped up growth in total listings.

The stresses experienced in global financial markets also filtered through to the domestic

secondary bond market. The third and fourth quarters of 2008 were, for the most part

characterized by higher outflows of capital from the domestic bond market as foreigners fled to

the relative safety of US Treasuries. However, as from Q2 2009, net inflows are being observed

in these markets.

4.3 PROFILES OF AFRICAN STOCK EXCHANGES

I. Operating Structures of African Stock Exchanges:

African stock markets face challenges not only in their functional efficiency as discussed earlier,

but in their operational efficiency. Brokerage services are poor, and settlement and operational

procedures are slow. In some countries, it takes months to execute a single transaction. This is

mainly due to lack of automation and weak stock market operational infrastructure, in addition to

lack of quality personnel. The tables below summarize the infrastructural indicators of African

stock Exchanges.

Table 14: African Stock Exchange Profiles

EXCHANGE YEAR OF

ESTABLISHMENT

REGULATOR MARKETS

AVAILABLE

SETTLEMENT

CYCLE

TRADING

MECHANISM

COMMODITIES

EXCHANGE

1 SA‐BESA 1996 FSB Cash, Bond &

Derivatives

T+3 Short Selling &

Borrowing

NA

2 BOTSWANA‐

BSE

1989 MoF Equity & Bond

Market

T+4 Day Trading NA

3 MOROCCO‐

CSE

1929 CDVM Cash & Bond

Market

T+3 Online NA

4 EGYPT‐CASE 1883(Alexandria)‐

1903(Cairo)

CMA Cash & Bond

Market

T+2 Intra‐Day, Online NA

5 GHANA‐GSE 1990 SEC Cash & Bond

Market

T+3 NA NA


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Source: ASEA Handbook

Key: BESA: Bond Exchange of South Africa

LSM: Libyan Stock Market

ACSE: Abuja Commodities & Securities Exchange

NA: Not Available

6 SA‐JSE 1887 FSB Cash & Derivative T+5 Margin, Intra‐Day,

Online, Short

Selling &

Borrowing

NA

7 SUDAN‐KSE 1994 MoF Cash Market T+0 Intra‐Day NA

8 LIBYA‐LSM 2006 LSM Cash Market T+3 NA NA

9 MALAWI‐MSE 1996 Reserve Bank

of Malawi

Cash Market T+5 Intra‐Day NA

10 KENYA‐NSE 1954 CMA Cash & Bond

Market

T+5 Intra‐Day NA

11 NAMIBIA‐NSE 1992 NA Cash & Bond

Market

T+5 Intra‐Day; Margin NA

12 NIGERIA‐NSE 1961 (NSE): ASCE

(2001)

SEC Cash & Bond

Market

T+3 Intra‐Day; Online ACSE

13 MAURITIUS‐

SEM

1989 FSC Cash & Bond

Market

T+3 Intra‐Day NA

14 UGANDA‐USE 1997 CMA Cash & Bond

Market

T+5 NA NA

15 ZIMBABWE‐

ZSE

1946 ZSE Cash Market T+7 Intra‐Day; Short

Selling &

Borrowing

NA

16 Tanzania ‐

Dar‐es‐

Salaam Stock

Exchange

1996 CM&SA Cash Market,

Bond Market

T+5 On‐line Trading NA

17 Zambia –

Lusaka Stock

Exchange

1993 SEC Bond Market T+3 Intraday Trading NA

18 Mozambique

Stock

Exchange

1999 MoF Bond Market T+3 On‐line trading NA


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In analyzing the infrastructural characteristics of African capital markets, it is plain for all to see

the almost identical nature of the trading mechanisms, systems and products available in these

markets with the exception of South Africa, Zimbabwe, Mauritius, Namibia, Egypt and Morocco.

Does this trend seem familiar? These are the same stock markets that are giving Kenya’s stock

exchange a run for her money. Some similar characteristics come out very clearly from this

analysis that are inherent in Africa’s leading stock exchanges and that are not characteristic of

Kenya’s and many others namely:

vi. The diversified nature of the available mechanisms used for trading in these markets.

These include On-line trading; Margin trading and short Selling and Borrowing.

vii. No restrictions to foreign participation in the stock market

viii. Shorter settlement cycles

ix. No Tax restrictions in some of these markets e.g. Egypt, Morocco and Mauritius. In

South Africa, they are no tax restrictions for resident investors.

x. With Regards to South Africa, the availability of a derivatives market.

The diversified nature of trading mechanisms significantly increases volumes and turnovers of

stock exchanges. The same can be said for having derivative markets as this is an additional

product to the current mix offered by African stock markets which will create an alternative

investor base in the capital market and also acts as a hedging product for investors in the equity

as well as bond markets. This in turn increases activity in exchange traded products universally.

II. Automation of African Stock Exchanges:

Table 15: Automation of African Stock Markets COUNTRY CSD TRADING SYSTEM TRADING DAYS

Algeria Electronic Electronic 1*

Botswana Electronic Manual 5

Cote d'Ivoire Electronic Electronic 5

Egypt Electronic Electronic 5

Ghana Manual Manual 5

Kenya Electronic Electronic 5


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Malawi Manual Manual 5

Mauritius Electronic Electronic 5

Morocco Manual Electronic 5

*Namibia Manual Electronic 5

Nigeria Electronic Electronic 5

South Africa Electronic Electronic 5

*Swaziland Manual Manual 5

Tanzania Electronic Electronic 5

Tunisia Electronic Electronic 5

Uganda Manual Manual 5

Zambia Electronic Manual 5

*Zimbabwe Manual Manual 5 Source of Data: International Financial Statistics (IMF); Emerging Markets Database (IMF); Table adapted from Senbet & Otchere

(2008).

In addition, Sub-Saharan African stock exchanges are gradually adapting to electronic systems,

but many of them still use manual trading systems as well as manual clearing and settlement

systems. Table 15 shows indicators of African stock markets infrastructure, showing the

prevalence of slow manual systems. The exorbitantly low turnover indicators we observed

earlier should partly attributable to these manual systems. Thus, it is important that sub-Saharan

African stock exchanges adapt fast to automation and electronic systems. This adaptation

reduces the costs and inefficiencies associated with manual systems increases trading activity

and liquidity in the stock markets by speeding up operations.

Off course, automation is an expensive undertaking with considerable resource applications for

governments sponsoring stock exchanges. However, Africa has to be fully engaged in this

venture of stock market development and adopt best practices in operational efficiencies. This is

particularly important as African stock exchanges contemplate regional consolidation of

markets, which would be difficult without automation. In-fact, without such moves, the benefits of

regional integration, as well as financial globalization of Africa, will vanish.


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III. Demutualization of African Stock Exchanges Demutualization, refers to the entire process of changing the legal structure of a stock exchange

from a manual association, with one vote per member (and possibly consensus-based decision

making), into a company limited by shares, with one vote per share with majority-based decision

making16. It involves the separation of trading rights and ownership, and in most cases the

exchange becomes a for-profit firm and even, self list. Akhar (2002). The majority of African

stock exchanges are organized as mutual entities, but demutualization has gained popularity.

The main reason is that mutualization breed’s poor corporate governance. In a mutual

exchange, stock market participants, such as traders and brokers, have monopoly power

through exclusive access to trading systems.

Table 16: Ownership Characteristics of African Stock Exchanges Country Ownership Characteristics Botswana • Established by statute (Botswana Stock Exchange Act,

1994) as body corporate • Statutory body Committee of Botswana Stock

Exchange manages exchange • 3 members appointed by Minister of Finance • 2-6 elected from membership of stock exchange

BRVM • Private corporation

• 13.5% owned by the West African Economic and Monetary Union (WAEMU)

• Remainder distributed among brokerage firms, chambers of commerce and industry, sub-regional institutions and other private institutions or WAEMU companies

Egypt • Mutual; Member-based Ghana • Company limited by guarantee

• Member owned Kenya • Registered under the Companies Act in 1991 as a

company limited by guarantee (Mutual, Member based) Mauritius • Shareholder owned

• Trading membership separate from ownership Namibia • not for profit

• comprises 43 associate members (banks, listed companies, investment institutions, etc.)

• Executive Committee of nine members of the business community, representing different business sectors, and

16 IOSCO 2005


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the tenth member represents(Namibia Financial Institutions Supervisory Authority,

• Regulated by the Stock Exchanges Control Act (1985, amended 1992)

Nigeria • Limited by guarantee • Mutual, member based

South Africa • Mutual, member based Tanzania • Incorporated in September 1996 as a private company

limited by guarantee and not having a share capital under the Companies Ordinance (Cap. 212).

Zimbabwe • The ZSE is regulated by the Zimbabwe Stock Exchange Act Chapter 24:18 of 1996. It operates under the supervision of a nine member Committee comprising of 2 members appointed by the Minister of Finance and not less than 4 and not more than 7 members elected from within the stock broking fraternity.

With demutualization, there are gains from competition among exchanges and improved

governance due to market discipline on the insiders. These gains are being leveraged by

opening up ownership of exchanges to public investors.

Table 17: Demutualization Trends

Demutualized Exchanges Demutualization Date Listing IPO date Region

Stockholm Stock Exchange 1993 1998 Europe

Deutsche Bourse 2000 2001 Europe

Oslo stock exchange 2001 2001 Europe

BME Spanish exchanges 2001 Europe

Borsa Italiana SpA 1997 Europe

London Stock Exchange 2000 2001 Europe

Euronext* 2000 2001 Europe

Athens Stock exchange 1999 2000 Europe

Budapest stock Exchange 2005 Europe

Copenhagen stock exchange 1997 Europe

Swiss exchange 2002 Europe

Hong Kong stock exchange 2000 2000 Asia

Singapore stock exchange 1999 2000 Asia

Phillipines stock exchange 2001 Asia


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National stock exchange of

India

1993 Asia

Osaka securities exchange 2001 Asia

Bursa Malaysia 2004 2005 Asia

Tokyo stock exchange 2001 Asia

Australian stock exchange 1998 1998 Australia/Newzealand

Sydney futures exchange 2000 2002 Australia/Newzealand

New Zealand stock exchange 2003 2003 Australia/Newzealand

American stock exchange 2001 North America

Nasdaq 2001 2002 North America

Toronto stock exchange 2000 2002 North America

Chicago Mercantile exchange 2002 2002 North America

Chicago Board of trade

(CBOT)

2005 2005 North America

New York Stock Exchange 2006 2006 North America

New York Mercantile

exchange


Inter continental exchange 2005 2005 North America

International securities

exchange


Johannesburg stock exchange 2005 Africa

Table: Geographical Distribution

Region No. of demutualized exchanges %

North America 9 29

Europe 11 35

Asia 7 23

Australia/New Zealand 3 10

Africa 1 3

South America 0 0

Total 31 100 Source of Data: Table adapted from Senbet & Otchere (2008).


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It appears that the pressure for change is felt everywhere in the stock exchange industry, with at

least one exchange in all continents demutualizing. The exception is Latin America. Even so,

Mexico has initiated the process. One of the catalysts for demutualization has been

improvements in technology which have created both opportunities and threats for the

exchange industry. On the one hand, technological advancement has facilitated trading of

shares on several stock exchanges. Technology has also helped exchanges to overcome

national boundaries. Thus technology has expanded traded trading opportunities. On the other

hand, the migration of order flow to other markets has affected the local franchise that the

exchanges had in their respective countries. The increasing internationalization of financial

markets has reduced barriers to access and has set national exchanges in direct competition

with each other. Exchanges are also facing severe competition from electronic communications

networks (ECNs). In the context of Africa, demutualization can also help deter undue

government influence that could have occurred under mutual exchanges. Mendiola et al (2003)

and Otchere (2006) document evidence of the improvement in performance and governance of

demutualized exchanges. In addition, Otchere observed evidence of increased trading activity

by foreign investors after Australia’s stock exchange demutualization and self listing and

provides preliminary evidence that find that liquidity on the stock exchange improved after the

change of governance structure and the attendant conversation of the exchange to a publicly

traded companies.


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CHAPTER FIVE17 5.0 THE GLOBAL FINANCIAL CRISIS: IMAPCT AND OPPORTUNITIES FOR AFRICA

5.1 Macroeconomic Situation and Prospects

In the years before the global recession in 2009 most African economies had enjoyed

impressive economic growth, with average annual growth in 2006-08 amounting to about 6%

and gross domestic product (GDP) per capita growth to almost 4%. The African economies

benefited from a combination of favourable factors, including high commodity prices and rapidly

growing export volumes, generally prudent macro policies, debt relief and sustained aid and

foreign direct investment (FDI) inflows. Moves towards more market-friendly economic

framework conditions had also helped to foster growth. African growth would have been even

higher had it not been restrained by infrastructure bottlenecks (notably in transport and energy),

pervasive corruption and political instability in several regions. The world economic crisis

brought this period of relatively high African growth to a sudden end. In the meantime, the world

economy is recovering again, and Africa is expected to benefit from improved international

conditions. This chapter first looks at the international environment and then explores the

various channels through which the global crisis has been transmitted to Africa. It then

discusses how the African continent and the various regions and countries have weathered the

global crisis and what the economic prospects are for 2010 and 2011.

5.2 The global economy is recovering from its deepest recession since World War-II

In early 2009 there were fears that developed countries could fall into a depression like that of

the early 1930s. One year later, there are clear signs that the worst is over. Since mid-2009, the

world economy is gradually recovering, mainly driven by expansionary macro policies and a

positive inventory cycle. The global recession of 2008/09 had started in the United States with

the breakdown of the subprime mortgage market as a result of insufficient regulations. It then

spread to almost all parts of the world. Stock markets collapsed world wide, and business and

17 Adopted From African Economic Outlook 2010, a publication of the African Development Bank


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consumer confidence declined to historically low levels. The financial turmoil hit the global

economy at a time when it had already passed its cyclical peak after the supply shocks due to

price hikes of oil and non-oil commodities. Around the world, domestic demand weakened, and

the downturn was amplified and spread internationally through sharply falling foreign trade. The

recession was sharpest in developed countries. However, the crisis also severely affected some

emerging countries (such as Russia, Singapore, Mexico, and Hong Kong, China). In contrast, in

China and India, boosted by expansionary policies, output continued to grow at relatively high

rates, although somewhat lower than before. The African economy also suffered from the global

recession but has maintained – on average – positive growth.

The recovery of global output since mid-2009 could not compensate for the earlier losses.

Therefore, in 2009 world real GDP declined by around 2% against the previous year making

2009 the first year with negative global growth since World War-II. Output growth in the OECD

area contracted even more, by 3.5%. Global trade collapsed mainly owing to weaker import

demand in developed countries. Despite a recovery during the second half of 2009, global trade

volumes contracted in 2009 by 12.5%. The recession in the developed countries led to a sharp

fall of oil prices and other commodity prices. This was an important channel through which the

crisis has been transmitted to commodity exporting countries including those in Africa. While the

drop in commodity prices led to terms-of-trade losses in Africa and other commodity-exporting

countries, it provided terms-of-trade gains to commodity-importing countries. In that sense,

commodity exporters including those in Africa acted as shock absorbers and helped commodity-

importing countries overcome the recession. The terms-of-trade effects reversed, however, in

the course of 2009 when commodity prices recovered again.

The global downturn would have been even more severe and lasted longer had central banks

and governments all over the world not acted forcefully by implementing large stimulus

measures. Short-term interest rates were reduced in developed countries to historically low

levels, near zero. Monetary conditions were further eased by unconventional measures to inject

liquidity into markets, in particular by the so-called quantitative easing, which is an indirect way

of monetising government and private debt. Governments also provided direct support to ailing

banks and sometimes nationalised private banks. Fiscal policy supported aggregate demand

both through automatic stabiliser effects; that is, by accepting higher cyclical budget deficits due

to the economic downturn and by implementing additional large-scale stimulus packages. These

packages included additional infrastructure investment, tax cuts and subsidies to households


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including for the purchase of new cars. The cyclical effect on public budgets together with the

stimulus measures led to a sharp increase of budget deficits. In OECD countries, fiscal deficits

increased in 2009 on average by almost 5% of GDP to above 8% of GDP. These forceful

monetary and fiscal policies helped restore confidence and halted the economic downturn. In

the second half of 2009 most developed countries again achieved positive output growth.

However, because of the earlier decline, real GDP in 2009 as a whole remained lower than in

2008.

In April 2010 the global recovery was still not self-sustained and it is unclear at what point the

monetary and fiscal stimuli can be withdrawn without the risk of jeopardising the recovery. Given

the large fiscal deficits and future fiscal pressures from the ageing populations in many

developed and emerging countries, the fiscal room for further supporting aggregate demand is

limited, and countries will have to return to fiscal consolidation. Monetary policies will also have

to tighten and absorb the excess liquidity to prevent the resurgence of inflationary expectations

and asset bubbles. Indeed, a large part of the newly created liquidity has flown into financial

assets and has raised asset prices with the risk of new bubbles while business investment has

remained weak. But given the low capacity utilisation, as reflected by the large gaps between

actual and potential output, and the expected further deterioration in labour markets in many

countries, the exit from expansionary policies is expected only after 2010.

5.3 Global conditions are expected to improve in 2010 and 2011, but risks remain

Since the trough of the recession in the first half of 2009, the global recovery has made

significant progress. Global output is on the rise and business sentiment is improving world

wide. An exception is the development in emerging countries where – boosted by China –

industrial production already exceeds pre-crisis levels. A number of constraining factors

continue to weigh on the global recovery. In many countries private consumption is constrained

by household indebtedness, high unemployment, weak income growth and the withdrawal of

fiscal stimuli. Investment activity is dampened by the high degree of unused capacity and also

by credit constraints as banks consolidate their balance sheets. Financial markets remain

nervous as the financial position of some banks remains unclear and as sovereign risks of some

high-debt countries have increased. Furthermore, foreign trade growth could be constrained if

trade protectionist measures gain in importance.


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The global recovery is precarious. Nonetheless, global output is expected to increase by 3.4%

in 2010 and 3.7% in 2011. In many advanced countries, GDP growth will be lower than growth

of potential output so that unused capacities remain high and will further rise. While developed

countries are expected to recover only gradually, emerging countries, notably China, and also

India, will remain important engines for global growth. Given the moderate recovery of global

output, the increase in oil prices and non-fuel commodity prices is likely to remain subdued in

the near future.

5.4 AFRICAN ECONOMIC OUTLOOK-CHALLENGES AND PROSPECTS 5.4.1 Africa’s economic growth has been slashed by the global recession

Various channels transmitted the global economic crisis to Africa. The direct effect of the crisis

of the world’s financial centres on African banks was relatively small because of the banks’ low

degree of integration with international financial markets and relatively strict capital market

regulations. The major channel of crisis transmission was through the collapse of commodity

prices and the fall of export volumes. Another channel of crisis transmission was the decline of

workers´ remittances. Many African countries depend on remittances and, faced with job losses

or wage declines in their host countries, African workers reduced the transfers to their families

at home. A third important channel of crisis transmission was the decline of foreign direct

investment. Multinational firms reduced their investment globally and also in Africa, notably in

those sectors most affected by the global crisis, such as mining and tourism. On the positive

side, donor countries have generally maintained their aid commitments and disbursements to

Africa, despite substantial fiscal pressures at home. Furthermore, the debt relief under the

Heavily Indebted Poor Countries (HIPC) Initiative by the International Monetary Fund (IMF) and

the World Bank, which benefited 29 African countries has reduced debt service costs and

helped these countries cope better with the crisis. Last but not least, loans by the IMF, the

World Bank and the African Development Bank (AfDB) have been increased significantly.

5.4.2 Africa’s economic growth weakened but remained positive

Overall, it appears that the African economy has been more resilient to the global crisis than

other emerging economies, with the exception of those in Asia, notably China and India. The

effect of the crisis, although less severe than on most other continents, was nonetheless


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significant. Although in the three years before the 2009 global recession Africa had achieved an

average annual growth of around 6%, in 2009 the growth rate was slashed by 3.5 % to 2.5%;

actual growth in Africa was almost exactly what had been predicted in last year’s African

Economic Outlook (2.3%). The economic weakening was most pronounced in the mining and

manufacturing sectors, which recorded negative growth in many countries; these sectors were

particularly exposed to the fall of commodity prices and global trade. The other sectors, notably

agriculture and services, were more resilient and mitigated the economic downturn. In fact, in

most African countries agricultural sectors benefited from good harvests thanks to favourable

weather conditions. But in some countries, such as South Africa, Kenya, Chad and parts of

Namibia, bad harvests led to falling agricultural production, thus exacerbating the effect of the

global crisis. Domestic services including real estate and telecommunications (notably mobile

telephony) were generally resilient to the crisis and continued to contribute to growth. In

contrast, the global crisis heavily affected tourism sectors, which weakened GDP growth in

many countries (notably in Egypt, Madagascar, Morocco, Mauritius, Namibia, Senegal,

Cape Verde, São Tomé and Principe, and Seychelles).

On the demand side, both falling export demand and a weakening of domestic demand mostly

led the downturn. Private consumption benefited from lower food and energy prices, but

deteriorating labour markets and lower workers´ remittances often outweighed this positive

effect. Remittances declined in most African countries with the decline being most pronounced

in North Africa and in the neighbouring countries of South Africa. Business investment

weakened in most African countries as a result of falling capacity utilisation in mining and

manufacturing and falling foreign direct investment (FDI). The decline in commodity prices

reduced investment in mining sectors, which are often those where most foreign investment

inflows to Africa have historically been concentrated. In contrast, in several countries public

investment and public consumption increased as a result of fiscal stimulus programmes. The

weakening of exports and domestic demand, together with exchange rate depreciations in some

countries, led to a sharp decline in imports. As import volumes declined more than export

volumes, the real foreign balances of African countries improved (on average), thus mitigating

the adverse effect from weaker aggregate demand on domestic output.


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5.4.3 The global financial crisis depressed stock prices in Africa, but most markets have rebounded

Excluding South Africa’s Johannesburg Stock Exchange, African equity markets remain mostly

small and illiquid. Though the number of functioning stock markets have risen, the majority of

markets list only a handful of companies and post very low turnovers. Equity financing therefore

does not play a significant role in financing Africa’s investment activity. Nonetheless, the global

financial crisis has been a major blow to African stock markets as observed in chapter four

above. During 2009 African stock markets generally improved, again mirroring improvements in

international markets. The stock market rally was most pronounced in Tunisia. However, some

African stock markets, such as in Nigeria, failed to improve, owing to domestic problems

including difficulties in the banking sector.

5.4.4 Past fiscal prudence and disinflation have created space for expansionary macro policies

During previous economic crises in Africa, such as the commodity price busts of the late 1980s,

the response of many African governments had been to introduce direct controls, including

exchange rate controls and untargeted subsidies. This time policy responses were quite

different. Authorities generally refrained from direct controls with a few exceptions, such as in

Sudan, where the central bank introduced restrictions on foreign exchange to reduce import

demand.

Owing to fiscal prudence and generally better macroeconomic fundamentals, in the years prior

to the global crisis, and to the earlier debt relief, many countries were able to continue their

major public spending programmes. They thus avoided a pro-cyclical policy, which would have

aggravated the downturn. A number of countries, including South Africa, Kenya and Egypt, went

further by adopting stimulus packages and targeted programmes to mitigate the downturn’s

effect on poverty. But faced with deteriorating current accounts and falling exchange rates,

some countries, such as Angola, Ethiopia, Sudan and the Democratic Republic of Congo, were

forced to pursue tight fiscal policies to contain the fiscal and current account deficits and to

protect their foreign reserves.


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The weakening of the economies together with stimulus packages caused fiscal balances in

Africa to deteriorate on average by around 6.5% of GDP, from a surplus of 2.2% of GDP in 2008

to a deficit of 4.4% of GDP in 2009, thus mitigating the downturn of aggregate demand.

Monetary policy was also eased in most African countries by reductions in key policy interest

rates. The fall in inflationary pressures due to lower energy and food prices facilitated this

monetary easing. In South Africa, the central bank responded to the recession by cutting the

repo rate by 500 base points. Other African countries also instituted sizeable rate cuts such as

Kenya where the Central Bank Rate was cut by 125 basis points to ease liquidity in the

economy.

5.4.5 African economies will gain strength in 2010 and 2011

In the course of 2009, the world economy has resumed positive growth, world trade has picked

up and commodity prices have rebounded from their troughs. This forecast assumes that the

global recovery will continue at a moderate pace in 2010 and 2011 and that prices of oil and

non-oil commodities will remain at satisfactory levels. After falling by 2.5% in 2009, export

volumes of African countries are expected to increase on average by 3.2% in 2010 and by 5%

in 2011. However, as commodity exports to a large degree drive Africa’s economic recovery,

this recovery is not broad-based. Investment activity will recover only moderately, and private

consumption will remain weak in many countries as employment, wages and remittances are

only gradually picking up and as in some countries households remain highly indebted. Special

factors will boost growth in several countries. These factors include new investment and/or new

production of oil and gas in Chad and Ghana, and of uranium in Namibia; the upcoming football

World Cup will support growth in South Africa. Africa’s real GDP is expected to grow on average

by 4.5% in 2010 and by 5.2% in 2011. While this is a clear improvement from sluggish growth in

2009, growth remains lower than in years prior to the global crisis.


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CHAPTER SIX 6.0 RECOMMENDATIONS: The examination of the current state of African stock markets indicates the many challenges

that these markets face specifically in terms of low capitalization and liquidity. However, they

continue to perform remarkably well in terms of return on investment.

Given the important role well-functioning stock markets seem to play in economic growth the

policy question then becomes “what can countries do to promote them?” Fully answering this

question is well beyond the scope of any single study. Legal, regulatory, accounting, tax, and

supervisory systems influence stock market liquidity. The efficiency of trading systems

determines the ease and confidence with which investors can buy and sell their shares. And

the macroeconomic and political environments affect market liquidity.

Well functioning domestic stock markets are vital for domestic resource mobilization, since they

provide incentives and profitable options for domestic capital to be retained. Retention of

domestic capital is important in the light of massive capital flight that Africa has witnessed over

the years. The development of the local stock market is important both in terms of buffering the

volatility of external capital flows and helping achieve the political success of privatization.

Moreover, if Africans themselves are reluctant to invest in their own local stock markets, it can

hardly be interpreted abroad as a vote of confidence. Consequently, domestic participation is

important in building international credibility. Thus, policy measures should target the

mobilization of domestic resources through the cultivation of attractive investment opportunities

and fostering deep and well-functioning domestic stock markets.

The recommendations proposed in this paper should not be viewed independently but rather as

part of a whole fabric, as essential units to a process dedicated to the goal of capital market

improvement. All-in-All, the recommendations are meant to serve as guidelines to policy

formulation and decision making.


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6.1 Policies for building capacities of African Stock Markets:

The thinness and illiquidity of the current African stock markets, shortage of domestic resource

mobilization, the regions marginalization in the global markets for financial capital, coupled with

shrinking official aid flows, are at the heart of the challenges that these prescriptions are

intended to address.

Develop Incentives for listing on Stock exchanges as a means to achieve greater market depth

and trading activity. These include tax and fiscal incentives.

a) Foster public confidence and improve informational efficiency with disclosure rules,

accounting standards, enforceability of contracts, consistent with International best

practices.

b) Develop a well functioning stock market regulatory regime.

c) Privatization of state owned enterprises should be encouraged to be facilitated through

stock exchanges.

d) Strengthen institutions for corporate governance and adopt best international practice in

terms of measures for the effectiveness of the corporate Board of Directors and

increased shareholder rights against controlling shareholders/management.

e) Consolidate the African stock markets and harmonize laws, regulations, capital market

institutions and monetary systems across the integrating regions.

f) Development of a talented financial manpower capable of managing risk for both the

banking and equity market sector toward the enhancement of risk control mechanisms

as markets become more sophisticated, and possibly venturing into the derivatives

arena.

g) Strengthen and build a well functioning securities markets regulatory scheme with strong

supervisory, monitoring and enforcement role for regulators (e.g. risk based supervision)

h) Conduct privatization programs with transparency and ban government intervention in

the privatized enterprises and engage in full privatization rather than partial privatization

to avoid continuing government interference.

i) Foster the development of institutions that support and sustain African stock markets

such as pension funds, credit rating agencies etc.

j) Develop a comprehensive capital market database to foster both practitioner/investment

analyst research and academic research-making it possible for African stock markets to

be subject to best research practices.


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k) Quickly transform from manual into automated/electronic manual systems; the latter are

now the norm in the more advanced stock markets.

l) Consider demutualizing the stock exchanges as a mechanism for improved governance

stemming from separation and ownership of exchanges and promoting investor

confidence in the system.

m) Introduce measures that help foster linkage between formal and informal financial

systems, with eventual graduation into the stock markets.

In the case of Kenya, while all the above prescriptions apply, there are specific policy

formulation areas we could focus on immediately when compared to markets outperforming the

NSE in the continent which include:

a. To increase market size:

i. The provision of more incentives and programmes to encourage more listings on the

stock exchange: e.g. In South Africa, the main driver of new listings has been their

active policy of looking for new companies that qualify for listing throughout the

whole country whether large or small. They also arrange many international road

shows.

ii. The development of an OTC market (Alternative Trading Platform) that will cater for

the majority of companies that may wish to list but are hindered by the stringent

exchange requirements that could serve as an incubator market to the main

exchange. E.g. South Africa has developed an alternative exchange (AltX) for quality

small to medium companies. This is also the case with the Mauritius DEM. (The

study proposes that the Mauritius model could be adapted in the Kenyan context)

iii. The introduction of a derivatives market: The JSE has also operated a single stock

futures market (SAFEX) since 2001 which is now the largest such market in the

world. The development and operationalization of the Kenya Agricultural

Commodities Exchange would be a step in the right direction.

iv. The development of mechanisms to encourage companies to engage in dual listings.

v. The aggressive pursuit of establishing MOU’s with regional exchanges to encourage

cross-listings.


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b. To increase liquidity in the stock exchange:

vi. The complete automation of the market microstructure. This adaptation reduces the

costs and inefficiencies associated with manual systems increases trading activity

and liquidity in the stock markets by speeding up operations.

vii. The introduction of alternative trading mechanisms in the stock market especially on-

line trading, margin trading and short selling. However these mechanisms can only

be introduced once the stock market infrastructure and microstructure is fully

automated.

viii. Consider policies to increase the amount of shares available for sale in the stock

exchange (free float) without actually affecting the demand for the same shares. This

can be achieved either through cross-listing, dual listing or integration of stock

exchanges.

ix. Actively engage in programs aimed at achieving greater public confidence. Among

the principal measures that could assist in confidence-building are:

• Increasing media understanding and reporting on business matters;

• Increasing the enforcement authority of government agencies;

• Committing to public education as a primary goal of the public sector;

• Enlarging the capacity for institutional investing by pension and retirement funds; (as

the retail investors savings pool is traditionally low in Kenya)

• Encouraging issuance of preferred shares and corporate notes by private

companies; and

• Eliminating the second-tier labeling of listed securities as it is possible that this may

be viewed negatively by some companies as is the case in Kenya and Mauritius

before the latter rebranded the market.

It is encouraging to note that the Kenyan capital market is undergoing major reforms that are

geared towards addressing some of the issues highlighted above, in particular, the review of the

legal framework, the demutualization of the NSE, development and formalization of the OTC

markets, investor and public education and the adoption of a risk based supervisory regime.


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c. To Increase activity in the Bond Markets18:

The current financial crisis has added impetus and urgency to the need to develop domestic

capital markets in Africa due to the deteriorating fiscal space. The crisis has not only affected

the financial sector, but its impact is seen in the broader economy in terms of declining export

revenues and sudden reversal in capital flows, which hitherto had helped finance long-term

investments. This has led to deteriorating fiscal space, creating an urgent requirement for

governments to mobilize resources from domestic capital markets to help meet their budget

shortfalls. Furthermore, well-functioning and efficient domestic bond markets will guarantee

greater diversification of long-term financing and improve resource allocation into domestic

investments. This will enable African countries to access long-term debt in local currency

thereby providing much-needed financing for the constantly growing housing and infrastructure

needs.

This is imperative because these countries are unable to access international capital markets

and are faced with a likely decrease in aid financing in the face of the global financial crisis.

Indeed, it is estimated that Africa will need US$20 billion of infrastructure investment per year,

that is, double the current size, in order to narrow the gap with its developing country peers and

show faster progress toward the Millennium Development Goals (World Bank, 2005). This

translates into approximately 5 percent of GDP for initial investment and an additional 4 percent

of GDP for operation and maintenance (World Bank, 2005). The stock of housing finance is no

more than 2 percent in many African countries for which data is available compared to 39

percent in the European Union, 20 percent in South Africa, 16 percent in Thailand, and 15

percent in Chile (World Bank, 2007).

Bond markets, however, which are an integral part of the capital markets, remain largely

underdeveloped in Africa with corporate bond markets nonexistent or in their infancy. Indeed, in

most African countries the public sector dominates debt issuance, mainly with debt instruments

of very short tenor and activities focused on the domestic primary market with limited secondary

trading. As of the end-2006, 74 percent of the African countries issued treasury bills while only

49 percent of the countries issued longer-dated government securities (AfDB, 2007). Although

several countries have listed the bonds on the stock exchange, secondary market trading

remains virtually non existent due to the “buy and hold” strategy of domestic banks who hold the 18 Regional economic outlook, April 2007-IMF


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bulk (about 70 percent) of the debt due, in part due to the limited lending opportunities and also

due to some prudential requirements like liquid asset ratios in some countries that require banks

to hold a certain amount of their assets in government-issued paper. With the exception of S.

Africa, corporate bonds markets are largely nonexistent.

Bond markets are characterized by fragmented markets, high transaction costs, illiquidity and

general dissatisfaction with the primary dealer system. There is a fragmentation of the market

as evident by an excessive number of bonds issued with no benchmark bonds and insufficient

liquidity in each of the issues. In some countries such as Botswana, there has been a lack of

government bond issues largely because the governments has hitherto run budget surpluses or

have access to cheaper concessional donor funds19. In addition, there is a general

dissatisfaction with the Primary Dealer (PD) system among the regulators who argue that the

PDs do not effectively discharge their market-marking functions while the dealers are concerned

about the insufficient incentives. Also, there is a lack of issuance programs which impedes

potential investors (and PDs) from anticipating the future supply of securities.

Further, there is a pre-dominant “buy and hold” strategy by investors in the region coupled with

limited corporate issues and a narrow investor base. The “buy and hold” strategy serves to

exacerbate the problems arising from a limited supply of securities. The limited corporate issues

are a reflection of the competition from bank loans, underdeveloped corporate advisory services

coupled with excessive issuance costs and restrictive regulatory practices. Additionally, in

several countries both the government and corporate bond markets are constrained by the

narrow investor base which may partly be a reflection of the dominance of government-run

statutory funds in the institutional investment sector and a legal framework that does not

encourage the emergence of private pension funds and asset managers and/or the restrictions

on the entry of foreign investors.

Within East Africa, there are also several national initiatives underway in seven key areas. First,

work is underway to promote liquidity through reforming the government bond system including

through the consolidation of bonds into benchmark issues and re-opening of issues. Second,

there are initiatives aimed at improving trading and settlement systems, third, some work is

19 This may change in 2009/10 as increased expenditures and lower revenues are expected to create a deficit of 14% of GDP in 2009/10 which will be financed using government reserves and savings and, if required, by borrowing in domestic and international markets (Botswana 2009/10 government budget).


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underway to enhance transparency in primary and secondary markets. Fourth, there are efforts

to build links between issuers, regulatory authorities and market participants. Fifth, there are

efforts to reform the primary dealer system so as to enhance incentives for primary dealers and

strengthen the effective discharge of their responsibilities. Sixth, there is considerable marketing

and awareness-raising campaigns to encourage corporate bond issues and lastly, legal and

regulatory reforms are being undertaken.

The overall assessment of this report is that while bond markets at a national and regional level

remain largely underdeveloped, several initiatives are underway by governments, private

sectors and donors, however, with limited effectiveness. These are aimed at addressing

deficiencies in the legal system, enhancing bond issuance, broadening and diversifying the

investor base, strengthening market infrastructure, developing supranational, sub-national and

corporate bond markets and the promotion of regional initiatives. While pockets of collaboration

exist, a more inclusive partnership on the ongoing and planned initiatives is needed so as to

leverage synergies and maximize the effectiveness of the initiatives.

Market Reforms will have to focus on the following key issues:

• How Local and Global capital can be harnessed by efficient markets

• Investors will want to see:

– certainty - of owning and selling securities

– market liquidity

– depth and breadth of securities and reflection of the economy

– more and new products (derivatives)

– fair and equal treatment

– ease of trading

– low cost of trading

• Issuers will want to see:

– ease of raising capital

– efficient pricing

– tax breaks

– low costs associated with issuing

The following recommendations are therefore proposed:


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• Tax breaks to encourage more and varied issues

• Encourage listings that reflect the economic mix

• Lower trading and settlement costs

– Negotiated brokerage

– Lower statutory charges on higher turnover

• More and varied products e.g. derivatives

• Dematerialization of the securities industry

• Electronic trading including on-line trading

• Information availability – both company and trading

• Fair and equal treatment of all investors

• Separate brokers from market oversight

• Certainty and transparency around new primary issues

• Ease of securities placements

• Pension industry reform

– More investment products e.g. unit trusts and ETFs

6.2 CONCLUSION

To the casual observer, one glance at the performance of African stocks in 2009 may be

enough to deduce that the continent’s stock exchanges severely underperformed last year

In spite of this poor performance the combination of prevalence of hot money from gains in

India and China as well as the flat yields expected in mainstream US and European markets,

means that investors are now looking for the real growth story of 2010. They would be well

advised to consider Africa as an investment destination. It is precisely because of last year’s

performance that African stocks are a good bet for 2010.

However, the potential of African stocks this year is not just based on economic cycles and

investor behaviour. Instead, Africa boasts solid economic fundamentals, with a cheap P/E ratio

of roughly 12 and a dividend yield of some 5 %. Because of last year’s performance, the market

is also awash with cheap valuations that are sure to be exploited. Moreover, because of the

symbiotic nature of stock exchanges across Africa, much of the damage done last year were


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one-off events in one country that had a knock-on effect on markets across the region. As the

setbacks from these events subside, we can see markets recovering across the continent.

References: 1. The global financial crisis and sub-Saharan Africa The effects of slowing private capital

inflows on growth; José Brambila Macias and Isabella Massa; African Economic

Conference, 2009.

2. United Nations Development Programme (UNDP): African Stock Markets Hand book

2004.

3. African Business Research Ltd; ASEA conference, 2007.

4. The global financial crisis and sub-Saharan Africa The effects of slowing private capital

inflows on growth; José Brambila Macias and Isabella Massa; African Economic

Conference 2009.

5. World Federation of Exchanges –Annual Report 2008.

6. ASEA Year Book, 2007-2009.

7. IMF Emerging Markets Database 2008-2009.

8. CMA Survey on Investor Profiles ant the Nairobi stock Exchange 2007.

9. Tables sourced from Senbet and Otchere ,2008.

10. List of African Stock Exchanges: www.wikipedia.org

11. CMA Kenya Quarterly Statistical Bulletin Dec 2009.

12. United States World Commodities Trade Statistics , 2000.

a comparative analysis of theperformance o fafrican capital market volume 2 2010

Documents

african equity markets

importance of stock

state of african bond

performance of capital

african economics

largest markets

stock market parameters

comparative analysis