Celia Becker is an Africa Regulatory and Business Intelligence Executive at ENS, a law company with more than 600 lawyers and offices in seven African jurisdictions providing tax and legal services across Sub-Saharan Africa. She specialises in advising large multinationals expanding into the region on the tax-efficient structuring of investments, country risk profiles and tax and regulatory compliance requirements of countries throughout the region. She travels extensively on the continent and has practical experience advising in respect of 26 African jurisdictions. Celia is a South African qualified chartered accountant with a Master's degree in international tax. She started her career as an international tax adviser at a Big 4 accounting company and spent six years at a multinational construction company as Country Risk Director. She is a member of the South African Institute of Chartered Accountants (SAICA) and is a regular contributor of African jurisdictional content to various publications. Celia has lived and worked in Luxembourg, Mauritius and Rwanda. She is currently based in Johannesburg (South Africa).
Abstract
Africa appears to be an appealing investment destination, with African stock markets offering foreign investors the gateway to tap into the continent's potential growth opportunities. Despite the significant growth and development of stock markets on the continent in recent decades, however, there remain some obstacles to overcome. This paper aims to examine the challenges faced by African stock markets which diminish their appeal to foreign investors and assess regional integration as a potential solution. Key takeaways: (1) African stock markets are often inadequately regulated and exhibit limited size, depth and liquidity, compounded by high currency volatility, prohibitive trading costs and macroeconomic and political instability, making them less attractive to foreign investors; (2) policy makers and regulators in developing countries should focus on fostering the development of vibrant and liquid public equity markets that are well regulated by creating a favourable market ecosystem through legislation, tax incentives and other measures to encourage listings; (3) for financial markets to operate effectively, they must exist within a comprehensive supportive framework encompassing legal, economic and political elements and coordinated monetary policies, potentially through currency zones; (4) the regional integration of stock exchanges can facilitate global integration, and some progress has been made in this regard. African stock markets remain weakly integrated, however, and economic integration initiatives are still hampered by low intra-African trade and inadequate infrastructure; (5) while the African Continental Free Trade Area (AfCFTA) lays a solid foundation for economic integration, African countries should allocate additional resources to implement the AfCFTA and ensure increased intra-Africa trade to assist in making its stock markets more attractive to foreign investors and potentially launching a continental exchange in the future.
Keywords: Africa, intra-African trade, liquidity, operational inefficiencies, macroeconomic and political instability, regional integration, regulatory control, stock market, vulnerability extreme events
DOI: 10.69554/nxfz4587
AFRICA AS INVESTMENT DESTINATION
At first glance, Africa appears to be an appealing investment destination with favourable prospects and multiple opportunities to be explored. Not only is the continent rich in natural resources, such as minerals, oil, gas and agricultural land, it is currently experiencing a massive population boom. Home to 17 per cent of the world's inhabitants, Africa's population growth rate has been among the highest in the world for several decades.
At the current growth rate, it is expected that Africa's population will reach close to 2.5 billion by 2050, totalling more than 25 per cent of the world's population, and by the end of the century will account for as much as 40 per cent of the global populace.1 With a youthful and rapidly increasing population, Africa has the potential to benefit from a 'demographic dividend', where a large working-age population can drive economic growth and productivity. The region is also experiencing rapid urbanisation and a burgeoning middle class, creating an expanding consumer market for goods and services.
Many African countries are classified as emerging markets or frontier economies, offering greater growth potential and higher returns than traditional markets. African economies are diversifying, with new sectors such as telecommunications, consumption and infrastructure developing rapidly and providing access to growth. The continent is also witnessing a digital revolution, with the rapid adoption of mobile technology and the emergence of innovative solutions in fintech, e-commerce and others.
Investing in Africa presents a promising outlook with the potential for high returns, diversification and positive socio-economic impact. African stock markets offer foreign investors the gateway to tap into the continent's economy and leverage potential growth opportunities. But just how attractive are these markets to foreign investors?
THE DEVELOPMENT OF AFRICAN STOCK EXCHANGES
Stock markets on the continent have experienced significant growth and development in recent decades. The number of stock exchanges has grown from only five in SubSaharan Africa and three in North Africa in 1989 to 38 exchanges with a combined market capitalisation of US$1.6tr by 2022.2 The largest exchanges are in South Africa, Nigeria, Morocco and Egypt, but there are also smaller exchanges in countries such as Kenya, Mauritius and Ghana (see Table 1). Of particular interest are the regional stock markets on the continent: the Bourse Regional des Valeurs Mobilieres (BRVM), domiciled in Abidjan, which services all eight member countries of the West African Economic and Monetary Union (Union Economique et Monétaire Ouest Africaine [UEMOA]): Benin, Burkina Faso, Cote d'Ivoire, GuineaBissau, Mali, Niger, Senegal and Togo; and the Bourse des Valeurs Mobilières de l'Afrique Centrale (BVMAC), based in Gabon and servicing Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon, and the Republic of the Congo.
The African Securities Exchanges Association (ASEA) was founded in 1993 to lobby for and promote the role of African stock exchanges as catalysts for regional economic growth. It has the objective of empowering member exchanges to be significant drivers of economic and societal transformation in Africa. ASEA works closely with its member companies (currently including 26 exchanges) to champion common areas of interest, such as capacity building, market development and advocacy.
CHALLENGES FACED BY AFRICAN STOCK MARKETS
Table 1: The ten largest stock markets in Africa by market capitalisation, 2022 | ||||
1 | South Africa | Johannesburg Stock Exchange (JSE) | 1,171.75 | 237 |
2 | Nigeria | Nigerian Stock Exchange (NGX) | 91.43 | 173 |
3 | Morocco | Casablanca Stock Exchange (MASI) | 53.71 | 75 |
4 | Egypt | Egyptian Stock Exchange (EGX) | 38.85 | 239 |
5 | Botswana | Botswana Stock Exchange (BSE) | 31.02 | 23 |
6 | Kenya | Nairobi Securities Exchange (NSE) | 16.11 | 59 |
7 | West Africa | Bourse Régionale des Valeurs Mobilères (BRVM)3 | 10.50 | 46 |
8 | Mauritius | Stock Exchange of Mauritius (SEM) | 8.57 | 89 |
9 | Tanzania | Dar es Salaam Stock Exchange (DSE) | 6.70 | 22 |
10 | Ghana | Ghana Stock Exchange (GSE) | 6.46 | 30 |
Source: World Bank DataBank: Word Federation of Exchanges Database
Senbet and Otchere4 highlighted various challenges faced by these markets, most of which remain relevant today. African stock markets continue to grapple with ineffective regulatory control, liquidity constraints and fragmentation, which is often compounded by currency volatility and macroeconomic and political instability
Ineffective regulatory control
Well-established and enforced financial sector regulations protect investors' rights and can significantly reduce the utilisation of insider information, market manipulation and inadequate financial disclosure. African stock markets have been characterised by weak regulation, which has a major impact on the confidence of both local and international portfolio investors. Senbet and Otchere5 highlight that Sub-Saharan Africa has the highest percentage of private wealth held abroad, ranging from 30 to 40 per cent, as compared to 8 per cent in Latin America and 3 per cent in East Asia.
A 2018 study examined the impact of regulatory quality on stock market development in 12 selected African countries, making use of annual sample data for the period 1996–2016. It confirms that quality regulation exerts a positive impact on stock market development and concludes that Africa requires extensive policy reforms to effectively regulate financial markets and enhance investors' confidence in the region.6
In the recent past many African stock exchanges have strengthened their regulatory oversight to ensure compliance with international standards and best practices, including implementing stricter listing requirements, improving disclosure requirements and monitoring trading activities to prevent market abuse. Collaborating with international organisations such as the World Bank, International Finance Corporation (IFC) and International Organisation of Securities Commissions (IOSCO) provides access to expertise, resources and technical assistance to support governance reforms by African exchanges. These improvements in governance frameworks contribute to the overall development and credibility of African stock exchanges, but certain regulatory gaps still remain
Limited size, depth and liquidity
The performance of a stock market is measured by a number of key factors, including the transparency of the stock prices of listed companies, the frequency of stock trading and the overall market capitalisation. These elements are encapsulated in the efficiency, liquidity and size of the stock market respectively. A recent study7 of the development of the Nigerian, Nairobi and Johannesburg Stock Exchanges, three major frontier markets in Sub-Saharan Africa, found that, in general, stock markets in Africa are largely underperforming compared to advanced and other emerging markets.
Investors tend to have greater confidence in large stock markets, because they represent a broader array of equity investment options. Yet the size and depth of African stock markets pale in comparison to that of other markets. By 2020 there were only 1,251 companies listed on African stock exchanges, as compared to 2,347 entities listed on the London Stock Exchange and 2,933 on the Nasdaq. North African stock exchanges account for 397 listed companies and Sub-Saharan African exchanges for 854, with companies listed on the JSE constituting almost 40 per cent of companies listed on Sub-Saharan African stock exchanges. Even the two regional exchanges on the continent are very small; on the BRVM there were just 46 listed entities, and on the BVMAC, only four listed companies in 2020.8
A concerning trend is the decrease in the number of initial public offerings (IPOs) and the size of capital raisings in Africa, despite a significant increase in IPOs in the rest of the world since 2021. Equity capital raised in the Sub-Saharan market has decreased by about 73 per cent from 2020 to 2021 and, on the JSE, the number of de-listings has exceeded the number of listings during each of the preceding five years. The rest of Sub-Saharan Africa is experiencing a similar trend, which stakeholders ascribe to low valuations, high compliance costs and an onerous regulatory burden.9
Most of the African stock markets are dominated by a few large companies, with trading activity primarily focused on a handful of stocks representing a considerable share of the total market capitalisation. In addition, markets on the continent have historically had minimal participation from retail investors. Although this trend has been changing, mainly driven by technological innovations, many retail investors are still not very active. Between 2019 and 2022, 97 per cent of the approximately two million registered share accounts on the Nairobi Stock Exchange (NSE) was dormant.10 Furthermore, many African exchanges have been grappling with a lacklustre local investor base. The participation of domestic investors in a stock market plays a crucial role in establishing international credibility. When Africans exhibit hesitancy towards investing in their own local stock markets, it undermines confidence and credibility on a global scale.
A key requirement for a well-functioning stock market is liquidity, or the ease with which a stock can be converted into cash.11 High levels of liquidity in stock markets ensure that there are enough buyers and sellers in the market at any given time, allowing transactions to be executed quickly and at a fair price, without significant price fluctuations. The ratio of total value of shares traded on the exchange to gross domestic product (GDP) measures the market trading activity relative to the size of the economy, whereas the ratio of total value of shares traded to the total capitalisation of the market (known as the 'turnover ratio') provides a useful measure of the market's overall trading activity relative to the size of the stock market itself.12 A low turnover ratio indicates inadequate liquidity in the market, where minimal transaction volumes may influence the stock market price index and lead to increased volatility.
The average market capitalisation of listed companies in Africa was at 63.6 per cent of GDP in 2020, as compared to almost 100 per cent of GDP in East Asia and the Pacific. North Africa had a market capital capitalisation of 17.4 per cent and Sub-Saharan Africa 86 per cent of GDP. When excluding South Africa, the market capitalisation for the rest of Sub-Saharan Africa drops to 12.7 per cent of GDP, which is at the bottom of the rankings. Research by the European Investment Bank (EIB)13 also found that most African stock exchanges have a lower turnover ratio than other stock exchanges in emerging economies. As illustrated in Table 2, with the notable exception of the JSE and the Egyptian Stock Exchange (EGX), even the ten largest African exchanges display limited liquidity, which can make it difficult for investors to buy and sell securities.
Currency volatility
Fluctuations in the value of local currency can affect the returns on investment when translated into a foreign investor's domestic currency, making it difficult for investors to accurately assess and manage investment risks. Currency volatility can also increase transaction costs for foreign investors, while managing currency risk through hedging contracts such as forward contracts or options is often challenging and costly in markets with high levels of currency turbulence.
A study by Senbet and Otchere14 indicates that currency depreciation does indeed have a negative effect on the performance of African stock markets. The ongoing prevalence of high currency volatility in African economies exacerbates the risk associated with African stocks, thereby presenting a further barrier to foreign investors.
Vulnerability to extreme events
Emerging stock markets provide great opportunities for investment growth and risk diversification; however, they are often more vulnerable to extreme market events.
An examination of the performance of African stock markets before and after the global financial crisis of 2007–200915 found that although African stock markets outperformed those in Asian and Latin American countries before the crisis, during the crisis (January 2008–February 2015) they experienced the sharpest declines in average returns, alongside heightened levels of total and systematic risk. African stock markets also displayed weak recovery rates, most of them being unable to return to their pre-crisis index levels and recording lower average returns since the peak of the global financial crisis. Interestingly, a 2023 study16 found that emerging and developed markets were affected by the COVID-19 pandemic on a similar scale.
OPERATIONAL INEFFICIENCIES
Cumbersome administrative procedures for company listings, high transaction fees and the slow adoption of technology serve as significant obstacles to the advancement of African stock exchanges.
Table 2: Liquidity indicators for Africa's ten largest stock exchanges, 2022 | ||||
1 | South Africa | Johannesburg Stock Exchange (JSE) | 26.7 | 57.8 |
2 | Nigeria | Nigerian Stock Exchange (NGX) | 2.4 | 0.5 |
3 | Morocco | Casablanca Stock Exchange (MASI) | 5.7 | 2.3 |
4 | Egypt | Egyptian Stock Exchange (EGX) | 28.9 | 2.4 |
5 | Botswana | Botswana Stock Exchange (BSE) | 0.3 | 0.4 |
6 | Kenya | Nairobi Securities Exchange (NSE) | 2.2 | 0.3 |
7 | West Africa | Bourse Régionale des Valeurs Mobilères (BRVM) | Not available | Not available |
8 | Mauritius | Stock Exchange of Mauritius (SEM) | 2.8 | 1.9 |
9 | Tanzania | Dar es Salaam Stock Exchange (DSE) | 0.4 | 0.0 |
10 | Ghana | Ghana Stock Exchange (GSE) | 1.0 | 0.1 |
Source: World Bank DataBank: Word Federation of Exchanges Database
High trading costs
High trading costs can undermine the efficiency, liquidity and accessibility of stock exchanges, ultimately hampering their development and effectiveness as key drivers of economic growth and investment.
The United Nations Economic Commission for Africa (UNECA)17 reports that fees and taxes on most African securities exchanges, including brokerage commissions, exchange fees for clearing and settlement and securities transfer taxes, impose a notably heavier burden compared to similar rates in other developing countries. Transaction costs in many developing countries are less than 1 per cent of the value of the trade, with Peru, for instance, charging levies of 0.46 per cent and Thailand 0.57 per cent. The fees in Uganda and Rwanda of 4.1 per cent and 3.4 per cent, respectively, are significantly higher.
In countries with smaller stock exchanges, high brokerage commission fees are often attributed to the limited number of licensed brokers and relatively low trading activity. In addition, a 2022 study18 found that transaction fees of African stock exchanges are also considerably higher than in developed economies. For example, unlike the London Stock Exchange (LSE), where an upper limit applies to the fees due by prospective companies that want to list, in the BRVM and the Stock Exchange of Mauritius, the transaction fee is an uncapped percentage of the transaction value.
Slow adoption of technology
The implementation of electronic systems can contribute to reducing the costs and inefficiencies of manual systems and enhancing trading activity and liquidity in a stock market through accelerated operations. This becomes particularly important as African stock exchanges contemplate regional consolidation of markets, as discussed below. Without automation, this would be a challenging task.
A study of 11 African stock markets for the period 2008–1719 found a positive correlation between the adoption of information and communication technologies (ICT) and stock market development and economic growth. This is evidenced by an observed increase in variables such as market capitalisation, number of listed companies, value of stock market trades and the stock market turnover ratio.
Many African stock exchanges have already started to adopt technology to upgrade and modernise their trading systems prior to 2020, and the COVID-19 pandemic acted as an additional catalyst for digital transformation.20 To date, the majority of Africa's ten largest stock exchanges have implemented electronic trading and/or clearing and settlement systems. The JSE's fully automated electronic trading system, called the Millennium Exchange, was launched in 2012, upgrading and modernising the previous trading platform, while the Nigerian Stock Exchange (NGX) adopted Nasdaq's X-Stream Trading platform in 2013.
In recent years various African capital markets have also started embracing digital tools to stimulate participation from retail investors. Many African exchanges have modernised their websites and introduced trading apps. For example, in June 2020, the Botswana Stock Exchange (BSE) introduced its mobile application, providing most of its web-based trading options. Likewise, the NSE also launched a similar application that year, with a specific focus on retail users. Nevertheless, smaller exchanges, in particular, continue to fall behind international counterparts in adopting the latest technologies, mainly due to inadequate funding. Consequently, the cost and technological challenges associated with trading on many African exchanges and listing companies remain relatively high and contribute to operational inefficiencies.21
Footnotes
1 Worldometer, 'Africa Population (Live)', available at https://www.worldometers. info/world-population/africa-population; Stanley, A. (September 2023), 'African Century', F&D Finance & Development, International Monetary Fund, available at https://www.imf.org/en/Publications/ fandd/issues/2023/09/PT-african-century (both accessed 20th April, 2024).
2 Oxford Business Group (July 2022), 'African Stock Exchanges: Focus Report', p. 5, available at https:// oxfordbusinessgroup.com/wp-content/ uploads/files/blog/specialreports/963936/ ASEA_Africa_Focus_Report.pdf (accessed 20th April, 2024).
3 Data in respect of the BRVM is not included in the World Bank DataBank but was obtained from the Sustainable Stock Exchanges Initiative, available at https:// sseinitiative.org/stock-exchange/brvm/ (accessed 20th April, 2024).
4 Senbet, L. and Otchere, I. (2008), 'African Stock Markets', African Finance for the 21st Century, High Level Seminar organised by the IMF Institute in Collaboration with the Joint African Institute Tunis, Tunisia, 4th–5th March, 2008, pp. 10–20.
5 Senbet, L .and Otchere, I. (2006) 'Financial Sector Reforms in Africa: Perspectives on Issues and Policies', Annual World Bank Conference on Development Economics: Growth and Integration, p. 83.
6 Umar, B. and Nayan, S. (2018), 'Does Regulatory Quality Matters for Stock Market Development? Evidence from Africa', International Journal of Economics and Financial Issues, Vol. 8, No. 4, pp. 11–14.
7 Imhanzenobe, J. O. (2023), 'Historical Development of Frontier Stock Markets in Sub-Saharan Africa', International Journal of Professional Business Review, Vol. 8, No. 7, pp. 3, 17.
8 European Investment Bank (EIB) (2022), 'Finance in Africa: Navigating the Financial Landscape in Turbulent Times, p. 29, available at https://www.eib.org/ en/publications/online/all/finance-inafrica-2022 (accessed 20th April, 2024).
9 PwC (2022), 'Africa Capital Markets Watch', p. 5, available at https://www. pwc.co.za/en/assets/pdf/africa-capitalmarkets-watch-2021.pdf; Muwowo, C. (February 2023), 'Are African Stock Exchanges Fit for Purpose?', African Business Magazine, available at https:// african.business/2023/02/finance-services/ are-african-stock-exchanges-fit-forpurpose#:~:text=Liquidity%20issues%20 and%20high%20trading,greater%20 trading%20volumes%20and%20liquidity. (both accessed 20th April, 2024).
10 Oxford Business Group, ref. 2 above, p. 30.
11 Sarr, A. and Lybek, T. (2002), 'Measuring Liquidity in Financial Markets', Vol. 2, IMF Working Paper, WP/02/232, pp. 4–5.
12 Senbet and Otchere, ref. 4 above, p. 10.
13 European Investment Bank (EIB), ref. 8 above, pp. 28–30.
14 Senbet and Otchere, ref. 5 above, pp. 105, 116.
15 Seck, D. (2017) 'The Performance of African Stock Markets Before and After the Global Financial Crisis', in Seck D. (ed.) Investment and Competitiveness in Africa, Springer, Cham, pp. 20–21.
16 Schackleton, R., Das, S. and Gupta, R. (September 2023), 'Comparing Risk Profiles of International Stock Markets as Functional Data: COVID-19 versus the Global Financial Crisis', University of Pretoria Working Paper, WP2023/08, p. 22.
17 United Nations Economic Commission for Africa (UNECA) (2020), 'Innovative Finance for Private Sector Development in Africa: Economic Report on Africa 2020', p. 76, available at https:// www.uneca.org/sites/default/files/ fullpublicationfiles/ERA_2020_ mobile_20201213.pdf (accessed 20th April, 2024).
18 European Investment Bank (EIB), ref. 8 above, p. 30.
19 Igwilo, J. I. and Sibindi, A. B. (2022), 'ICT Adoption and Stock Market Development: Empirical Evidence Using a Panel of African Countries', Risks, Vol. 10, No. 25, pp. 1, 13–14.
20 Oxford Business Group, ref. 2 above, p. 30.
21 Ibid., pp. 30, 48.
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