Traders at the Nairobi Securities Exchange. FILE PHOTO | NMG
Summary
- Wthdrawal of international capital impacted the region’s stock markets as liquidity dropped in the first half of 2020.
- The sudden drop in foreign activity showed the value of having deep and liquid local markets that can withstand external shocks.
- In South Africa, for instance, the credit ratings downgrades early in the year quickly dried up liquidity in the secondary bond market as foreign investors exited the bourse
Development of deeper, more liquid, local capital markets in Africa remains an uphill battle. Though a lot has been accomplished over the years - reasonably well-developed capital markets are now in place in many economies of the continent constituting an important global asset class - a lot lags.
The fourth annual Absa Africa Financial Markets Index proves this; only three countries (out of the 23 covered) enjoy equity turnover rates (as a percentage of market capitalisation) above 10 percent.
Only seven countries have bond turnover rates (as a percentage of listed bonds outstanding) above 30 percent. Overall, performance in market depth is shown to have deteriorated compared to the previous year.
My own view is that when the foreign investors' liquidity is removed, the market depth situation is a lot worse. This is because most equity markets liquidity is dependent on foreign investors.
Unfortunately, the capacity of local investors remains weak. But this is not easy to see. Growing internationalisation of African market securities, notably, the rising integration and new role of market countries in the global economy, and the growing sophistication of financial markets and risk management, has easily masked this deficiency. But this year, this soft underbelly became apparent.
Wthdrawal of international capital impacted the region’s stock markets as liquidity dropped in the first half of 2020.
The sudden drop in foreign activity showed the value of having deep and liquid local markets that can withstand external shocks.
In South Africa, for instance, the credit ratings downgrades early in the year quickly dried up liquidity in the secondary bond market as foreign investors exited the bourse.
Needless to say, that well-functioning local capital markets make a vital contribution to the efficiency and stability of global financial intermediation.
Many African economies, happily, have been taking the right steps. Domestic institutional investors across African markets, particularly pension funds, have become an important force in local economies. Their assets have been boosted by improving pension and investment regulations and GDP expansion over the last decade. The value of pension assets across Africa increased by over Sh 8 trillion from 2008 to 2015, while insurance assets grew by Sh6.5 trillion over the same period.
Nonetheless, pension funds and other institutional investors can play a significant role in capital market development. Not only do they become large sources of capital, but their long investment horizon also allows them to move away from government bonds and bank deposits towards investments such as equities and corporate bonds, providing local markets with liquidity. They are an important source of liquidity for local government debt, reducing reliance on external finance.
Let me conclude by saying that in order for African financial markets to overcome the liquidity issues, boosting of the local investor base should be made an important objective. Why? Promoting a vibrant local investor base is a relatively low cost initiative with a potentially big payoff. Policy makers should, therefore, identify specific actions to foster home capital market liquidity and development.
Mr Mwanyasi is the managing director of Canaan Capital
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