The Case for Government involvement in the Capital Markets Development

There are only 14 domestic companies listed in our local stock exchange; this number stands unfavourably when compared to over 30 companies listed in Ghana, over 60 companies in Kenya, over 250 companies in Nigeria, over 360 companies in Egypt and over 450 in South Africa. Our Gross Domestic Product (GDP), as per the recent World Bank and International Monetary Fund reports is US$ 48 billion for Tanzania. Ghana’s GDP is US$ 40 billion; it is US$ 60 billion for Kenya; US$ 285 billion for Egypt; US$ 350 billion for South Africa and US$ 580 billion for Nigeria. So, we are better than Ghana in term of economy size, but we are almost two-third less on companies listed in the Exchange; in the same vein – our GDP is almost 80 percent to that of Kenya, but we are only 25 percent of Kenya when it comes to companies listed in the local stock market.

What are these statistics suppose to mean and why are we comparing ourselves with countries such as Egypt, Nigeria or South Africa? Are these relevant comparators? Yes and No – but, for the sake of this article let us narrow our focus into our neighbour, Kenya – there are 64 listed companies in the Nairobi Securities Exchange; out of these companies, eight (8) represents the agricultural sector; three (3) represents the automobile sector; eleven (11) representing the banking sector; ten (10) companies represents the commercial sector; five (5) from the construction sector; five (5) representing the energy sector; six (6) from the insurance sector; nine (9) companies representing the manufacturing and allied sector; six (6) companies representing financial investment sub-sector; one companies from the telecommunication sector.

And so, most of the sectors contributing to the Kenyan economic growth and size have used (and are using) their local capital market to raise tlong-term money from the public in order to finance either their initiations, or their expansion and growth, which eventually result into job creation, more business prosperity, economic growth, increased economic and financial empowerment, financial literacy, etc, etc. Apart from capital raising through issuance of shares, there are 30 outstanding corporate bonds listed in the Nairobi Securities Exchange – these have been issued by banks, telecommunication companies, housing finance institutions, infrastructure development projects, manufacturing companies as well as energy producing and distribution companies – this means companies are also using the Kenyan capital market to raise long term financing by taping into public money via the issuance of debt instruments.

Back to us, we have 14 domestic listed companies representing nearly four sectors of the economy: four (4) representing the manufacturing and allied sector, six (6) representing the banking and micro-finance; two (2) from the commercial sector; one from the energy sector and one from the agricultural sector. We have only two outstanding corporate bonds listed into our stock market.

If we use another common comparator that measures the depth and liquidity of stock markets, it is also clear to demonstrate the very small scale of our local stock market. While Kenya’s domestic market capitalization to Gross Domestic Product (GDP) is about 35 percent, we are about 12 percent. What does these statistics tell us? Local business enterprises have so far not been using the capital market to drive their enterprises growth, creating jobs and channelling investments and economic growth through the use of our stock market.

Another aspect that is also clear is that Tanzanians are generally not using the stock market for their savings and investment objectives – only 450,000 are currently using the stock exchange for their savings and investment activities. With such a dim picture, it seems that there is a minimal possibility that a highly securitized capital market can be produced in Tanzania, at least in the immediate term. That means, for now, the largely banking based financial market is likely to be the only route ahead of us. That is, unless there are clearly planned transformation drive to encourage and motivate the government and the private sector to understand how the capital market works and how best capital markets can be used to mobilise resources to finance businesses and development projects within the economy, nothing can largely change.

I, in some cases believe, our policy making system has to clearly understand the need to drive policy framework and legal infrastructure that recognises the potential of capital markets in financial resources mobilization and financing long term projects in our economy, with this in place, we can sketch the vision and route map for the long term direction and ambitions of policies that will enable us transform into having a financial market that embraces a mix of various instruments to finance our enterprises, development projects and economic growth.

Why is important that the government has to actively play a role, not only to in the establishment but also in the growth of the capital market industry? why shouldn’t the private sector take that leap? furthermore, one can argue that the Government’s role probably is to initiate the process that enables creation of a capital market system that enable the private sector to raise their long-term finances, how is it that it is the government business to continually development policies that are sensitive to the growth of capital markets?. Apart from the context of our political, economic and social history as a country and as a society, I believe that the government has the moral, political and social motivation to enable and encourage growth of the local capital market. Yes, the private sector may be educated, motivated and encouraged to use the capital market, but it only becomes more conceivable, an idea, to them once the market is deep, it is liquid and can provide good valuations outcomes — that is when private sector, driven mostly by profit and other understandably self-interest motives, can largely consider the use of capital markets. However, for the sake of creating a good society — governments, sometimes opts to do the right thing.
Government’s leading efforts for the capital markets growth has been in use for the history of capital markets development world wide. Let’s take an example of the Latin Americas star performer, Chile. Back in the early 1980s under Jose Pinera Echenique, he decided to breath a life into the then Santiago Stock Exchange when he introduced privately run pension funds. Monies that these funds accumulated enabled the financing of Chillen companies to prosper and expand operations far beyond their country’s borders to the point where they dominated the entire business sectors in Latin America. Currently Chillean Stock Exchange has more than 250 listed companies and a market capitalization in excess of US$ 230 billion.
Chilean Government can exemplify the good use to which capital markets can be put. As dependable engines for sustained economic growth, importance of well functioning capital markets is hard to overstate. I understand that in many parts of developing world, as is in our own country, this importance is not yet fully grasped or, in deed, understood. In whatever case, we need to do something.
Other countries that are good examples to how best can the country (the Government) put the good use of the capital market into play is Hungary and Jordan – different from Chile that used the demand side, i.e. using pension reforms to grow their local capital market, Hungary and Jordan increased the depth of their capital market by increasing supply of securities through privatization of key sectors and companies via listing them into their local stock markets.

For us, we have well documented policies and strategies to either use approaches deployed by Chile (addressing the supply side), or the Hungarian and Jordanian or even Sri-Lankan approach (addressing the demand side) to grow our capital market, grow our business enterprises, create quality and sustainable jobs, increase the wider economic welfare of our people, increase our financial literacy and the growth of our the economy at large. We have in recent years reformed our pension sector — but so far these reforms have failed to clearly and specifically address issues related to financing local business enterprises via the capital markets. We also have well articulated privatisation policy, we have the local economic empowerment policy, we have the local financial inclusion policy, we have good pieces of legislative actions meant to grow our local capital markets (i.e. EPOCA and Mining Act, both of 2010); we have created institutions to specifically implement some of these policies, but, we are just not yet there. What lacks is the coordination and probably a champion with the government to remind and require our operatives to implement these well documented and well intentioned policies and strategies.

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5 thoughts on “The Case for Government involvement in the Capital Markets Development

  1. Absolutely right. Having a vibrant capital market is more than just a ‘me too’ vanity project like a national airline. It is a vital engine that can drive economic growth and create weath. Governments must pay attention.

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