REGIONAL INTEGRATION OF THE CAPITAL MARKETS AND
REGULATION OF CROSS BORDER INVESTMENTS-East Africa’s Experience
Presented at the Regional Workshop on Non-Bank Financial Institutions
in Africa
Mauritius 9 – 11 November 2003
by
Japheth Katto Chief Executive Officer
Capital Markets Authority, Uganda
Presentation Outline
Introduction- Benefits of integration- History of cooperation
The East African currency board The (first) East African
Community The collapse of the EAC Revival of the East African
Community EAC convergence criteria Progressive performance The journey towards capital
markets integration EASRA’s and CMDC’s mandates Snapshot of the regional market Progress on market integration Other regional initiatives BVRM,
CISNA, ASEA Challenges and stumbling blocks Conclusion References
Introduction
“There is a strong view among various observers and stakeholders that effort should be made to promote an integrated regional capital market given that, on an individual
country basis, the investor base is too narrow and small to support the emergence of a truly dynamic capital market in any of
the three countries.
..……. even a regional capital market will continue to be small in the short to medium term and would benefit from linkages with
other markets in Africa and beyond that are experiencing rapid growth.
There is, on the other hand, an opposing view that favours the development of free standing national capital markets.
Proponents of this view argue that disparities in the levels of development of the
capital markets in the three countries and differences in their regulatory framework render the pursuit of market integration
meaningless and unattainable. ”
Mr. Godfrey Tumusiime, Director General, East African Development Bank
7th November 2003
Introduction
Benefits of integration Economies of scale (larger
and deeper market, cheaper to serve, more liquid, higher absorption capacity)
Economies of scope (savings from shared costs of central services (e.g. CDS)
Faster growth (cross border activity)
Shorter learning curve (shared experience)
Regionally & globally competitive as block
Introduction
History of cooperation in East Africa
1917 Customs Union between Kenya and Uganda,
Tanganyika joins later in 1922
1919 East African Currency Board
1948 High Commission 1961 Common Services
Organisation 1961 Tanzania independence 1962 Uganda Independence 1963 Kenya Independence 1967 EAC Treaty Signed 1971 Idi Amin coup in
Uganda
Introduction
History of cooperation in East Africa cont’d..
1977 EAC Collapses 1986 NRM Government in
Uganda 1993 Permanent Tripartite
Commission for East Africa Cooperation
1999 Revived EAC Treaty is signed
2000 Entry into force of the Treaty
2002 NARC Government in Kenya
2004 January, EAC Customs Union protocol to be
signed
The East African Currency Board
Established in 1919 and started issuing legal tender of Kenya, Tanganyika and Uganda in 1920
Par value of £1=Shs 20 EA
Ultimate aim was to anticipate and to pave the way for the creation an East African Central Bank
June 1965 – Ministers of Finance announce in their budget speeches that separate currencies and national central banks would be created in 1966.
The East African Currency Board cont’d……
Tanzania was of the view that an EA central bank could only work effectively under a political federation
Uganda preferred semi-autonomous national banks linked to a central reserve bank directing certain functions
Kenya preferred one central bank responsible for the common currency
The limitations imposed on national economic policies and ambitions soon after independence
No previous experience of one central bank serving two or more independent states
The East African Community 1967-1977
Signed in Kampala in June 1967
Focus was mainly on commercial exchanges, open inter-territorial trade, balanced industrial development and taxation policy in a common market system
First provision was for the free exchange of the national currencies and these actually traded at par for a couple of years
Partner States were required to “harmonise their monetary policies to the extent required for the proper functioning of the common market.”
EAC collapsed in 1977, when the Finance Council failed to approve the 1977/78 EAC budget
Why did the first EAC collapse
Intra-community political differences
Differences in the sharing of benefits from the jointly owned common services and lack of policy for redress
The then East-West divide
Low private sector and civil society input in the community
Lack of a shared vision
NO POLITICAL WILL
Revival of the East African Community
30.11.93 Permanent Trip’tite Commission for
EA Cooperation established
14.03.96 Cooperation Secretariat established - the
executive arm
30.11.99 EAC Treaty signed in Arusha
07.07.00 Entry into force of EAC Treaty
30.11.01 Inauguration of the EALA and EA
Court of Justice Jan 2004 Signing of the EAC
Customs Union Protocol
NEW EAC PEOPLE CENTRTED, PRIVATE SECTOR DRIVEN
EAC Convergence Criteria
Maintenance of low underlying annual inflation of less than 5 percent.
High and sustainable annual rate of growth of real GDP of at least 7 percent per annum.
Sustainable current account deficit to GDP ratio.
Budget deficit to GDP ratio (excluding grants) of less than 5%.
National savings to GDP ratio of at least 20 percent in the medium term.
Gross foreign exchange reserves equivalent to at least 6 months of imports in the medium term.
EAC Convergence Criteria cont’d…. Maintenance of low market
determined interest rates.
Maintenance of stable market determined exchange rates.
Pursuit of debt reduction initiatives to reduce both domestic and foreign debt to sustainable levels.
Maintenance of prudential norms of banking regulation, strict supervision, improved corporate governance and transparency of all financial transactions.
Progressive Performance
Average GDP growth rates in Uganda and Tanzania at 5.0 percent but declining growth in Kenya. Kenya trend has reversed with NARC Government
Source: MD Sajjabi Presentation AACB Kla
-1
0
1
2
3
4
5
6
7
8
9
Uganda
Kenya
Tanzania
Progressive Performance cont’d….
Inflation has been contained within single digit levels in the three countries
Source: MD Sajjabi Presentation AACB Kla
-5
0
5
10
15
20
25
Uganda
Kenya
Tanzania
Progressive Performance cont’d….
Current account to GDP (exc. grants) has declined to less than 5.0 percent in Kenya and Tanzania but Uganda’s deficit remains high at more that 13.0 percent.
- Trend of Budget deficit is similar.
Source: MD Sajjabi Presentation AACB Kla
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
Uganda
Kenya
Tanzania
Capital markets integration journey
Nairobi Stock Exchange was the bourse for all East African Companies from 1954
1977 Collapse of EAC Non- Kenyan companies de- listed Capital Markets Authority (K) born
1990 Capital Markets and Securities
Authority born 1994 Dar es Salaam Stock Exchange
born 1996 Capital Markets Authority (U) born
in 1996 Uganda Securities Exchange born
in 1997 MOU establishing EASRA in 1997 (East African Member States Securities
Regulatory Authorities) Full stock exchange membership 1999 CMDC established April 2001 (Capital Markets Development Committee)
Capital Markets highlights of the EAC Treaty
Article 85Implementation of capital market development program and creation of conducive environment for the movement of capital within the Community
Article 86Develop, harmonize and integrate financial systems
EASRA’s Mandate Develop common capital market
strategies Harmonize laws and structures Foster regional stock exchange
(with a trading floor in each capital)
Facilitate cross-border trade & issues
Facilitate national status for East Africans
Development of market infrastructure
Development of policy proposals for capital markets incentives
Development of proposals for the alleviation of impediments
Development of a common trading system
CMDC’s Mandate
Sectoral Committee of the EAC
Makes policy proposals to the three member states through the EAC secretariat
Makes joint proposals with the fiscal and monetary affairs committee to EAC Finance Ministers at annual pre-budget meeting
Snapshot of the regional market
-
100
No. of Listings
Country
Equity Listings
Equity Listings
Equity Listings 50 5 6 61
Keny Ugan Tanz Total
-
50
100
Popn In Millions
Country
Population
Population
Population 31 24 37 92
Kenya Uganda Tanzani Total
Snapshot of the regional market cont’d…..
-
2,000.00
4,000.00
USD Millions
Market capitalization as at 18th Nov. 2003
Series1 3,467.00 661.60 680.24
Kenya Uganda Tanzania
Listed Bonds
-
10
20
30
40
50
60
70
Country
No
of
Lis
ted
Bo
nd
s
Government Corporate
Government 60 - 3 63
Corporate 4 2 2 8
Kenya Uganda Tanzania Total
Snapshot of regional market cont’d…..
GDP at current market price (US$ Billions)
11.5
5.8
9.2
0
2
4
6
8
10
12
14
Kenya Uganda Tanzania
Country
GDP
US$
Bill
ions
GDP at current marketprice(US$ Billions)
Progress on Market Integration
Legal and Regulatory Common English Law system Harmonization of legal framework
(on-going) Harmonization of disclosure
requirements (on-going) Harmonized trading rules and
procedures Corporate governance guidelines Framework for dispute resolutions Framework for Collective
Investment Schemes Guidelines on the issue of
corporate debt Cross border listing requirements
regulations CDS Legislation (on-going)
Progress on Market Integration cont’d….
Structural/Institutional Common market
structure (3-tier) Establishment of a
regional CDS (on-going) Development of websites Training and study tours Regional certification
program (on-going) Regional studies Cross border listings
Progress on Market Integration cont’d….
Policy According all East
Africans domestic investor status (ongoing)
Regulatory consolidation (discussions)
Harmonization of tax rates and tax incidences
Provision of tax incentives
Pension sector reform
Other regional integration initiatives in Africa
The West African Stock Exchange (BVRM)
BVRM
- Created; 18th December 1996
- Activities started; 16th September 1998
- Member countries; Niger, Mali, Burkina Faso, Benin, Togo, Cote D’Ivoire, Senegal, Guinea Bissau
- Population:74.30 million- GDP; US$ 26.17 billion(40%
for Cote D’Ivoire)- Growth Rate: 2.6% (2002)- Inflation Rate; 3.1% (2002)
BVRM Cont’d….
Burkina Faso – 1 Benin - 2 Cote D’Ivioire - 38 Guinea Bissau - 0 Mali - 0 Niger – 0 Senegal – 2 Togo - 2
No. of listed companies
2% 5%
85%
0%0%0%4% 4%
Burkina faso
Benin
Cote D'Ivoire
Guinea Bissau
Mali
Niger
Senegal
Togo
BVRM Impacts
Increase in savings rate - 1996 = 12.90% - 2000 = 16.05% Mobilization of long term
capital-Treasury bonds of Cote D’Ivoire
<-> US$98.46million- Bonds of Chemical industry of Senegal <-> (=US$ 23.08 million- Bonds of Telecommunication Company of Senegal <-> US$ 18.46 Million- Bonds of Bank of Africa of Benin <-> US$7.69 Million
Other regional integration initiatives in Africa
Southern African Development Cooperation’s (SADC) – Committee for Insurance Securities and Non bank financial Authorities (CISNA)
African Stock Exchanges Association (ASEA)
Challenges and stumbling blocks
Macro economic stability Policies not fully
harmonized (e.g. foreign investment restrictions)
No free movement of people, capital and investments
No single currency Low level of awareness High poverty levels Poor savings culture Different paces towards
liberalization Tax policies not fully
harmonised Not single investment area
Challenges and stumbling blocks cont’d… Lack of depth and
liquidity Information asymmetry Regulation arbitrage Underdeveloped and
unliberalised pension sector
Development of long term insurance sector
Raising more savings to finance investments
Multiplicity of regional blocks (map illustrates)
Conclusion No integration will succeed
without political will Regional integration is a
way forward if Africa’s capital markets are to compete in the global market
Explore regional stock exchanges. BVRM good example. Alliances can be a good first step
African Union and NEPAD should provide backbone
EAC made significant progress towards integration/single market
Quote…
“ ‘Emerging Markets’ may be a euphemism but it is also a declaration of hope and
faith. Although some of the stock markets of
developing nations may sometime seem
‘submerged’, they are generally emerging into
bigger and better things”
Mark Mobius, Investment Manager, Templeton
Emerging Markets Group
References
Capital Market Integration in the East African Community, the World Bank, December 2002
East African Community Treaty
Achieving market integration; Scott McCleskey 2003 (Elsevier Butterworth Heinaman)
Sub-regional monetary integration: challenges and prospects. The case of the East African Community (EAC). Presented at the 27th annual assembly of the Association of African Central Banks (AACB) by M.D Sajjabi , Economist (fiscal and monetary) East African Community secretariat; 18th August 2003, Kampala, Uganda
For more information contact
Capital Markets Authority76/78 William Street
Bank of Uganda BuildingP. O. Box 24565
Kampala
Tel: + 256 041 342788Fax: +256 041 342803
Email: [email protected]:
www.cmauganda.co.ug
THANK YOU