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Contributor: James Ogunleye
Africa's Stock Markets: Open For Business?

Later this year Africa's newest stock market, Kampala Stock Exchange, will open for business. It will be a milestone in Uganda's march towards full economic liberalisation. More importantly, KSE will provide an added boost to the fledgling equity markets in Africa; hence a testimony to the continent's growing equity culture.

What started like child's play in Sub-Saharan Africa (excluding South Africa) in 1924, with the opening of the Zimbabwe Stock Exchange (ZSE), is set to become the toast of Western investment bankers. But equity markets in Africa didn't quite catch world attention until after the introduction of the International Monetary Fund-induced structural adjustment programme in the mid 1980s. SAP was the IMF solution to Africa's age-old economic decline and stagnation. The thrust of the programme was to reduce government involvement in the economy by making the private sector the centre-piece of economic activity. The ultimate objective however, was to ground the African economy in the art of market enterprise. SAP was based on the following policies: realistic exchange rate (a.k.a. large devaluation), market-determined interest rates, tight fiscal and monetary policies, a return to balance of payment equilibrium and privatisation.

By early 1990s many of the policy-objectives had been implemented. The road was then clear for governments to move on to the next phase of the reforms: privatisation of state-owned companies. This is what spurred the creation of stock exchanges in some reforming economies. Indeed, Ghana, Swaziland, Namibia and Zambia opened their stock exchanges between 1990 and 1994 after Botswana and Mauritius, in 1989. Now, some experts believe Africa is the place to be. "It [Africa] is definitely the next place that investors will be looking at for the latter part of the 1990s," opined Nigel Rendell, emerging market strategist at London broker James Capel. This is not an understatement. In the past eighteen months, no less than five investment portfolios (funds) have been set up for Africa. Between five funds managers (investment banks) - Alliance Capital, Morgan Stanly, Fleming, Emerging Markets Management and International Finance Corporation's Africa Fund - more than $430 million has been raised to invest in stocks and shares in various bourses in the continent.

A major factor responsible for the return of investors' confidence in the emerging markets in Africa is the privatisation of public enterprises. The IMF-backed reforms demand that governments reduce public expenditure (in order to reduce budget deficits) by hiving off money-guzzling, inefficient state companies. The IMF also argues that privatisation would enable governments to raise additional revenue to finance various capital projects. In April 1994 the floatation of Ashanti Goldfields Corporation, in Ghana, raised more revenue than the authorities had hoped for: a cool $68 million on the Ghana Stock Exchange (and another $350 million on London stock exchange). With that singular act Ghana stock exchange total market capitalisation (its total worth) ballooned from $400 million to around $2 billion. Kenya has also benefitted from similar policies. The privatisation of Kenya National Bank, last year, was over subscribed by 300 per cent. Also in Zambia the on-going privatisation has rekindled activities on the local stock market. The market will receive a further boost, come 1997 when the Government is to shed up to 60 per cent of its holding in the Zambia Consolidated Copper Mines, the state largest foreign exchange earner.

But other equity markets on the continent are not waiting until 1997 to show the world their potential. For examples, the C?te D'Ivoire stock market, founded in 1976 now with total market capitalisation of $415 million, rose 34% in 1993. Kenya's stock market rose 14%, while Namibia recorded a 21% increase. Mauritius' market grew 50% last year, while Ghana's 30% in 1993 was up bettered with 80% in the first quarter of 1994. Zimbabwe Stock Exchange (ZSE) index doubled, and was adjudged the best performer of the lot by the World Bank affiliate, International Finance Corporation (IFC) in 1993. The same IFC and the Financial Times now have ZSE on its `Emerging Markets' Index. Overall, Africa's 15 operational bourses, with a total capitalisation of $260 billion (including South Africa), grew by an



average 30 per cent in 1993.

However, it must be pointed out that much of the investing funds now going to Africa are, in reality, chasing stocks on Johannesburg Stock Exchange. Founded in 1887 and now eleventh largest in the world, JSE has a total market capitalisation of $248 billion. Last year $800 million out of an estimated $1.2 billion portfolio flows for Sub-Saharan Africa went to South Africa. There are many reasons why western funds managers are falling over each other to pump money into South Africa. The stable polity since the all-race election in April 1994 is a key factor. Stable macroeconomic policies and the liberalised investment regime are other reasons.

In most other parts of Africa, political and macroeconomic instability and inefficient financial management are the bane of equity markets. In Nigeria, for example, the chaotic political and business environment have continued to keep investors' at bay. Last year the Nigerian Stock Exchange, with total market capitalisation of $1.1billion fell 18% due to the political crisis.



But one common problem with all Africa's stock markets, is low capitalisation. Meaning: securities (stocks and shares) are not widely available for fund managers to invest in. Excluding South Africa, Africa's market capitalisation is a measly $12 billion. But then some experts believe these markets are worth more than the West's estimate of $12 billion. "Even taking the risk premium into account, African markets remain undervalued," countered Kofi Bucknor, the Ghanaian Executive Director (emerging markets) at US investment bank, Lehman Brothers.Other obstacles to African stock markets include inadequate market information (difficulty in gaining information on supposedly quoted companies), poor telecommunications, large scale corruption in the financial markets and often-complicated settlement procedures. "It (the settlement system) is an extremely important aspect which has been neglected so far," said Kofi Bucknor.

With obstacles as formidable as these it will be sometime before Africa really opens for business
 
 
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