Samallie Kiyingi
During the African Development Bank Annual Meetings in Abidjan recently, Babacar N’diaye, a former president of the African Development Bank (AfDB) made a provocative comment; “with the exception of South Africa, there are almost no capital markets in Africa”. Most finance professionals would agree.
The scale of the problem is enormous.
According to the African Securities Exchanges Association, if we take Sub-Saharan Africa 2013 data indicates that market capitalisation of their 21 member exchanges was $1.6 trillion of which an astounding 83% was attributed to the Johannesburg Stock Exchange (JSE). The market capitalisation of India by way of example is currently around $1.5 trillion. Nigeria, despite being Africa’s largest economy, comes in at $86billion.
What does this mean in practice?
It means that Africa is sitting on: a gold mine that could potentially unlock a substantial portion of the $93billion per annum needed to finance infrastructure; a platform that could inject much needed capital into Africa’s growth engine – SMEs; a much needed tool to facilitate private equity exits and thus encourage even greater investment in African corporates; an avenue for the growing pension fund industry to diversify and deploy its assets on the continent; and last but not least, a vehicle that could enable Africans to play a more active role in their own economic development. While it’s not quite a silver bullet, it’s potential is under-estimated and it’s development is under-resourced.
Learning from Asia
Asia is a good example of the transformative impact of developing domestic capital markets. The 1990s saw the rise of the Asian tiger – rising manufacturing, growing middle class, booming economies. Yet the Asian financial crisis put all this at risk. The region’s reliance on FDI and bank funding exposed them to a currency and maturity mismatch that threatened their financial system. To avoid a repeat of this, there was a concerted multilateral effort to develop domestic capital markets and in so doing transform the regions savings into long term stable investments.
Today Africa faces challenges quite different from those of Asia in the late 1990s but there are lessons to be learned. The most salient being that access to deep, liquid and mature domestic capital markets can provide a sustainable domestic growth platform and mitigate what can be a dangerous over-reliance on bank debt or foreign currency financing.
But what of private equity?
Despite the flurry of activity private equity in Africa stands at around $8.1bn. While this is a fantastic achievement for the PE industry in Africa, it is nowhere near enough to develop the continent. Nor is it particularly well suited to meet the continent’s development needs like infrastructure.
The benefits? Undeniable
Effective Domestic and regional capital markets can provide a sustainable way of mobilising both local and foreign capital. Liquid capital markets can give African pension and insurance companies more options to deploy their growing asset base across a range of short and longer-term investments.
Local companies could benefit by having access to catalytic capital to grow their businesses. Even PE firms stand to gain, as efficient capital markets would provide another potential exit strategy, something that many firms struggle with in relation to their Africa portfolio.
But it’s a long road ahead…
Capital markets however do not develop themselves. Simply having a stock exchange or a legal framework covering equities and bonds does not automatically translate into a ready pipeline of issuers or investors.
Frameworks need to be refined, strategies need to be developed, confidence needs to be built, technology needs to be introduced and both issuers and investors need to be wooed. It is a long road but a good place to start is a careful assessment and analysis of what is currently not working in the local and regional capital markets across the continent.
This should involve not just an analysis of the legal and regulatory framework but it should also a look at tax, transaction costs, red tape, market education and liquidity to develop an understanding of what is needed to create confidence, liquidity and depth.
So are capital markets a silver bullet for Africa’s finance and investment needs?
Probably not. They are however a huge under-utilised, under-resourced and under-estimated tool with the potential to deliver a much needed sustainable funding and economic development.
Untapped resource; unrealised potential; unimagined wealth. Interested? Watch this space…
Samallie Kiyingi
Samallie Kiyingi is the former Head of the Securitisation Advisory Group at Deutsche Bank and currently a Managing Director at ADI Advisors. She is a member of the UK Government’s Emerging Economies Capital Markets Task Force and the author of a soon to be released report on deepening capital markets in Nigeria.
