Last Friday, I was invited as one of the speakers in the launch of Maseru Securities Market. In my talking points early on that day’s procession I had requested Lesotho’s Minister of Finance, Dr. Mamphono Khatetla and the Governor of the Central Bank of Lesotho, which hosts the Exchange, Dr. Retselisitsoe Matlanyane to seriously consider the need for continued Government’s support for the Exchange.
My request for the Government’s support in their newly formed local Exchange was in the following areas: government’s privatisation through the Exchange, listing of Government securities in their Exchange, provide fiscal incentives to encourage more issuers (for IPOs) and investors, as well as Government subventions, particularly those focused in financing public education and awareness creation campaigns. As it were, my plead came from an experience in running the Exchange in an African environment.
In her keynote remarks, the Minister, to my delight, promised that the Government will continue to support the Exchange in anyway possible, that is until it becomes self-sustained and a stage where private sector can take it over. To start with, she indicated that the Government of Lesotho will list some of the previous state-owned entities, in which the Government retained shareholdings in trust on behalf of the people of Lesotho, during privatisation.
Why am I compelled to think African governments’ continued role in the local exchanges, many of which are still in their nascent stages, is vital?
For one fact, we are coming from a low base and a different school of thought on how we run and organise our economic activities so that in the end such economic coordination and set up propels many people people within the society towards a happy life. We don’t have enough knowledge and experience, to run economies in an open market and transparent manner. Economic liberalisation and democratisation of our governance and decision making coupled with globalisation, particularly in these past few decades, has left many African countries with no choice but embrace what is available and necessary. Fortunately, what is bailable and necessary, in this context, is for governments to find an optimal combination of tools that will efficiently finance our economic development. One such tool is the capital market.
The truth is, in the past two decades, Africa has seen a relatively good growth in number of stock markets. Stock exchanges in the continent has grown from five (5) in mid-1990s to now 26 exchanges. So, in terms of number of exchanges, Africa has made some strides in the right direction, however, we may need to note is that most of these stock markets are lacking the depth, liquidity and valuations to attract many players. How do you achieve the depth and liquidity necessary for a vibrant stock market? one of the few solutions is to use already existing structures and systems (i.e. state-owned entities) as a launching pad for the growth of what seem to many as a new concept, which is also difficult to digest. The other, is to encourage central governments, local governments, sub-nationals, parastatals, etc to use local capital markets to mobilise funds for financing some of the development projects such as infrastructure.
Due to less than expected governments’ involvements with local capital markets, issues such small amount of IPOs are contributing to inefficient and ill-equipped stock exchanges across the region. And, since there are some existing deep rooted structural and cultural challenges related to how public and private sector enterprises are financed (and run) in Africa. Issues such as the love for lack of transparency, or the need for high standard of governance or more disclosure, or fiscal management discipline, etc contributes in making both public and private sector to consciously and willingly sacrifice the efficiently priced source of capital.
Otherwise, governments’ could see the necessity of encouraging transparency, good governance, etc within the business community and society at large by privatising many of the state owned entities via exchanges, this is leading by example and there is a strong economic and moral argument for governments to pursue this approach.
Upon a choice to pursue this approach, there is an opportunity here to seriously contribute to Africa’s economic development, and industry experts are constantly calling for governments and stakeholders to focus on stock exchanges and get them up to speed.
Emphasis on African stock exchanges growth is even more pertinent now as the region is seeing a growing demand for new issues (IPOs). Over the last fives years, for instance, valuations achieved through private equity exits in Africa via a stock market listing, yielded a higher return than could have been achieved in any private transaction, proving that investments in African listed firms are paying off like never before. What’s more, the amount of investors looking to invest in Africa’s small, medium or large-cap funds is growing as these markets continues to develop. As for now, the number of listings in Africa’s stock markets is lower than comparable regions, with just over 1,000 listings in Sub-Saharan Africa (a third of them being listed in the Johannesburg Stock Exchange), compares poorly to about 3,500 companies that are listed in India or 1,700 firms listed in China.
Despite these structural and cultural impediments, however, high financial costs associated with going public, such as initial and annual listing fees, as well as the direct and indirect costs that come with meeting exchange reporting deadlines and disclosures are some of the excuses given by enterprises. In relation to these, governments’ support via providing fiscal incentives and amnesties for both issuers and investors continues to be vital. However, what’s more, a lack of information on the advantages of listing and concerns about losing control have made many entrepreneurs wary of disclosing business details and ceding control. Therefore, supporting any efforts by Exchanges in public education efforts and awareness creation to the society is key.
After all being said, the limited number of listings in various African markets means that more needs to be done. Undoubtedly, fund managers and other such investors in the continent have a small number of promising shares to invest in. This leads to a lack of diversification of portfolios, and regional and sector concentration of assets. In addition, we have seen price distortions on liquid securities given the dearth of investable stocks.
Because of this imbalance in the supply and demand of new issues, IPOs present a good opportunity for African entrepreneurs and for the growth of the stock exchanges on the continent. Statistically, most new listings in Africa perform well and are heavily over-subscribed, as investors continue to flock to the few listings made. Thus, it may prove crucial to change practices in African stock exchanges to attract foreign investors.
In conclusion, there is strong evidence that stock markets can be an essential part of a developing economies. Studies by the IMF concluded that, supported by the right policies and reforms, stock markets can help African companies expand operations, contributing to economic growth. There is therefore need to ensure that there exists organised, efficient market where the governance standard and permission requirements are on par with international standards. In this respect, fostering better grounds for more listings in the African market will boost capital inflows into the region’s economies. For instance, raising equity finance via the capital market is often considered more profitable than capital raising in private market groups. As such, African entrepreneurs could be motivated to list their businesses if they were made aware of the access to capital – this again would boost the economy.
Enterprises are the backbone of economic growth as they drive industrial output and create jobs. Hence, the ability of companies to access growth capital is paramount for increasing employment, domestic spending and investment, resulting in increased GDP.
What’s more, listings enhance transparency and promote good governance, as IPOs subject companies to scrutiny and exposure. Luckily, environments favourable to the growth and improvement of bourses are beginning to take root in Africa. Political stability is increasing inside many countries, while sound economic policies and accountable institutions are slowly but surely being implemented. What needs to tip off an explosive growth we all anticipate in these markets is a bit of more governments taking interest in the growth of local stock markets.