By almost every measure, the outlook for Africa’s capital market is unclear. Given that it has been plagued with illiquidity, volatility, and little innovation, there are little signs left that hold out hope.
To begin with, developing countries require an amount of $8-10 trillion in annual investment to achieve the Sustainable Development Goals (SDGs) by 2030 per the World Bank. Impliedly, African countries that find themselves in this bracket, would need to strengthen their capital markets in order to mobilize financing to spur investments.
The Capital market in context encompasses the stock exchanges and the bond markets which play critical roles as intermediaries linking issuers and investors. In simpler terms, Capital markets are described as engines that help power economies. As engines, they must be robust to drive development and should be equally well maintained to enhance optimal performance and growth.
However, in the case of the African capital market, this engine, though operational, remains underdeveloped with what could be described as not-so-inspiring results. The African engine, therefore, is not robust enough and requires great attention.
A good question to ask then is why the continent struggles to mobilise funds to support its needs. Has the continent forgotten that “there is nothing like homemade foods” as compared to scrambling for other unknown diets?
Perhaps the first point of the call would begin with a look into the African capital markets' terrain.
African Capital Markets are floundering
The African Capital market space specifically that of South Africa dates to the 15th century and has evolved over the years with other African countries joining in some decades ago. The market, currently with a capitalization of $2 trillion and twenty-five (25) stock exchanges, under the African Securities Exchanges Association, except for the singleton South African market, is still seen to be illiquid and highly fragmented with weak regulations.
There is the argument that a greater fraction ofAfrican economies ventured into the capital markets space much later ascompared to most advanced economies and as such should be considered to be inits development stages, but for how long will the market continue to suck onmilk when other emerging markets such as South Korea, have moved on to crackbones?
It is fair to say that the African capital marketshave suffered. In 2021, for instance, the Equity Capital Market activity fell,recording the lowest further offerings in the last five years. Data from Dealogicevinced that in 2019, the number of Initial Public Offerings (IPOs) was 9 andfurther offerings (FOs), was 62. In 2020, the figures dropped to 7 IPOs and 53FOs respectively.
The African Equity Capital Market ended 2021 with 8Initial public offerings (IPOs) and 38 Further Offerings (FOs). This performance did not reflect that of global markets at all as there was a global surge in IPOs in 2021. To make matters worse, some companies pulled away from the equity markets with increased delisting of stocks, attributed to low valuation and high cost of corporate actions.
Below is the trend of the equity market in the past five years.
Source: Dealogic& Bridgewater Analysis
The intractable challenges
It is hardly any news that capital markets cannot develop in unstable economies. This is because macroeconomic stability is considered a bait for investors and multinational corporations to invest in an economy. However, in the case of Africa, market fundamentals such as volatile exchange rates, interest rates, and high inflation risks continue to persist, thus inhibiting the performance of the capital markets.
One would have thought that the African capital markets having regulatory bodies, capital market master plans or policies in place would expand the potential of its markets. But it is clear that having an umbrella does not stop one from being beaten by the rains as ownership differs from usage in a lot of ways. Most of the policies have not been properly executed to yield desired results
On another sad note, the growth of stock exchanges in Africa has been impeded by the few varieties of trading instruments and the extremely low volume of listed stocks. The majority of the stock exchanges have been extant for quite some time, but most continue to be underdeveloped. According to ODI Research, equity shares and bonds are the available financial instruments in most markets except for JSE, where derivatives are currently traded.
Regarding the debt markets, COVID-19 may have increased the participation of African economies in issuing foreign-denominated bonds with over $193.4 billion raised in 2021. On the local bonds markets, government bonds such as treasury bills etc. were oversubscribed. The issue with the local bonds now is that persistent inflation coupled with depreciating currencies as in the case of Ghana is forcing investors to reconsider investing in local bonds due to the risk and uncertainty at such a time like this and therefore opt to hold foreign currencies such as dollars which appear safer.
The implications
The inability of policymakers to deepen the capital markets has rippling effects. Take, for instance, African economies’ interest in Eurobonds. The Eurobond market has rather become more attractive to African governments at the almost neglect of the domestic capital market. The issue with these bonds is that they are comparatively expensive because they are issued in foreign currencies, so the inability to pay the yields plunges the country into distress levels as in the case of Zambia in 2019. Again, the downturn of a country having unsustainable debt level affects activities on the Eurobond market as it can lead to downgrades of sovereign credit ratings, thus driving bond yields higher and making debt market funding far less attractive.
The continent boasts of a lot of SMEs and has received support from DFIs, and NGOs alike to facilitate SME financing needs. However, the real issue is, how many of these SMEs have gone ahead to become unicorns or transitioned into corporate space?
Advanced economies have seen lots of unicorns partly because of the existence of strong capital markets. The enabling conditions that have allowed these firms to thrive, unfortunately do not exist in undeveloped capital markets. Even with the Private Equity Funds and Venture Capital Funds which seem to be doing well on the continent, the amounts are capped at $50 million and are usually growth capital.
The underdeveloped state of Africa’s capital market has greatly affected private sector activities. A buzzing capital market enhances access to funds by private firms through means such as listing on the stock exchanges among others. It also contributes to curbing the issue of foreign exchange volatility as most of the monies are raised in local currencies. But the current state of the African capital market has left most private firms with little choice but to source for external funds besides the banks which come at a high price.
But this doesn’t have to continue for long if Africa’s capital markets are properly strategized.
Strategizing for growth
African economies can do more with the capital markets than is currently being done. Thankfully, the Africa Union (AU)’s flagship Agenda 2063 shows the commitment of policymakers on the continent to strengthen domestic resource mobilization through the building of continental capital markets and financial institutions as well as reverse the illicit flows of capital from the continent by 2025. The onus lies on the African Governments to ensure the stabilization of local currency and macroeconomic indicators, to provide the enabling grounds for capital markets to flourish.
To draw more players to the markets, certain incentives and tax waivers can also be used as in the case of Mauritius and Tanzania. In Tanzania, for example, listed companies enjoy zero capital gains tax, and a reduction in corporate tax to 25% from 30%, among others.
Enhanced investor education and workshops will pique the interest of the locals and private firms toward the growth of the capital market as it has been known to improve participation in the market according to the African Securities Exchanges Association.
Arguably, the Government can steer the private sector by providing the right policies they require to thrive. This has a way of boosting their participation in the capital markets. The other side of the bargain is that the private sector must also be open to investing alongside the government in growth-generating projects.
African economies can subscribe to programs from DFIs, NGOs and Impact funds geared towards capital market development. For instance, the World Bank and the IFC launched a Joint Capital Markets program in 2017 towards the development of local capital markets. The program provides both advisory and transaction support to mobilize private sector financing via capital markets to key strategic sectors agreed with the Government. Peru joined and has seen an increase in financial inclusion among SMEs and as such African countries can enroll to benefit as well.
The charge on African capital markets has been less innovative financial products. Thus, innovative financial products can be developed along cross-cutting solutions necessary to help improve the capital markets. Green bonds can be explored to attract investors as climate and sustainability have become a global charge. Also, product offerings on the stock exchanges can be expanded to look at Exchange Traded Funds (ETFs) And Real Estate Investment Trade (REITs) to improve the liquidity of the exchanges.
Conclusion
Undoubtedly, developing a strong capital market is one sure way to lead the continent to a desired destination of prosperity. When it comes to the African capital markets, it is palpable that the ride has been slow for most African economies.
If a lot of emerging markets have successfully built strong capital markets, why not Africa? According to Soumare (2020), the continent rests on a pension fund of $700billion. The World Bank and PWC also posit that Africa’s sovereign wealth managed a cumulative $300 billion in assets under management as of 2020. These resources can be channeled to improve the liquidity of the local markets under the right market mechanisms and structures.
