Attracting Foreign Investments for Growth of Capital Market

Towards the end of September this year FTSE Russell, one of the leading global providers of stock market indices and associated data service, including markets/countries’ classification, reached out to the Dar es Salaam Stock Exchange (DSE), informing us that as part of the FTSE Country Classification Annual Review, the FTSE Russell Country Classification Advisory Committee and the FTSE Russell Policy Advisory Board have approved the addition of Tanzania to the “FTSE Watch List” for possible Classification into Frontier Market Status, from the current status of being Unclassified.
What does this mean, it means that by being in the Watch List, the wider global market is being alerted that there is a depth engagement taking place by the FTSE Russell with the DSE which is being considered for a classification, and therefore invites an opportunity for investors to share their experience of operating in the DSE, with regard to market and regulatory environment; Custody and Settlement of Securities; the dealing landscape and derivative markets. Thus, it means, Tanzania via the DSE is being considered for possible classification, into a Frontier Market status by September 2019. What role does country classification play in enhancing investment flows?
Often misunderstood or underestimated, country classification (into either Developed, or Emerging or Frontier Markets) has been identified as one of the leading factors that contribute to the amount of investment, particularly, passive investment funds that a country receives. Gaining a status automatically provides an opportunity for a country to access vast pools of global investment funds. It means that if the country is unclassified, as we currently are, does not have access to the pool of these global passive investment funds.
Let us get a feel of how relevant and significant this is – according to LSEG Africa Advisory Group it is estimated that, globally, more than US$1.3trillion is benchmarked to the FTSE Global Equity Index Series alone, which covers securities in 48 different countries based on Developed, Advanced Emerging and Secondary Emerging status. So, US$265billion tracks FTSE Developed Indexes; and US$130billion AUB (Assets Under Benchmarking) tracks FTSE Emerging Markets Indexes. There is also a relatively significant amount of funds tracking the Frontier markets, to which we currently do not feature into that space.
One may question, we notice that about 70 to 80 percent of trading volumes and turnover in the DSE emanates from foreign investments, so what difference does this potential classification make relative to what we have achieved already? A good question — it is well and good that we have an annual average of US$150million of foreign portfolio funds invested in the DSE listed securities, it is good in the sense that we are increasingly able to attract foreign funds to supplement and compliment the domestic mobilized funds that finances our development and enterprise activities. However, the funds we have so far been able to attract are largely “active” investment funds managed by small to medium sized fund management houses, where individual fund managers perform their own scouting, researches, analysis, scoping, recommendations and investments, given the limited volumes of research and coverage available for active investing on our economies. This makes passive investing argument much more feasible and practical – such activities are costly for individual fund managers, given the economies of scale and the significant amount of management fees involved, i.e. passive fund management strategies require a fraction of the management fees compared to those required for active investing, leading to higher net returns for passive investors. It makes sense therefore to actively attract global passive investment funds into our market, and country classification is fundamental to this process.
Thus, upon classification the DSE, and the country, will be in the investment map of global passive investment funds who allocates their investment funds only to countries that have achieved classification by global rating agencies, (and fund sizes invested in these identified particular markets depends on the market’s classification status, whether frontier, emerging, or developed market status).
So, what this means is that a country’s classification status signals confidence in a market and points to a level of sophistication through adherence to certain objective criteria required to achieve a given status. As alluded above, it also reduces costs of investing in a market, hence higher investment return.
We know that for us to continue our sustained growth, our stock market must develop in line, enabling greater employment and wealth creation within the economy. Our ability to attract global investment funds, now that passive funds have been identified as a key form of capital, providing support to economies by providing access to investors worldwide, is fundamental.
At present, only 10 countries in Africa are classified by FTSE Russell, with two Emerging (Egypt and South Africa) and eight Frontier Markets (Morocco, Mauritius, Kenya, Botswana, Cote d’Ivoire, Tunisia, Nigeria and Ghana). Looking at the entire continent, 44 countries are left unclassified which means that over 80 percent of Africa’s countries are not included in any of the global passive flows tracking Frontier/Emerging Markets. Hence, for the DSE and Tanzania to achieve a classification status will be a significant step, hopeful this will come to pass in the next few months, i.e. if some of us will continuously and consistently live into the criteria that brought us into this stage in the first place.

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