Tackling Liquidity Concerns in African Capital Markets


Eromosele Abiodun posits that to attract investors, tackle liquidity concerns in African capital markets, legacy issues of poor macroeconomic management and fiscal discipline as well as persistent corruption and weak institutions, must be addressed

Development financing continues to be a big challenge but some hope is emerging for African countries. The size of the resources needed to lift countries out of poverty by 2020 or 2030 continues to increase. Some estimates put the resources needed at over $200 billion a year for energy, irrigation, roads and rail; while there are also similar figures required for improvements in health, education and social protection.

Countries, experts believe, will need to make progress on all these fronts to reduce poverty and improve the standard of living of their populations. Progress is, however, being made. For instance, 11 African countries have grown sustainably at 6 per cent or above since 2009. These countries, which include Nigeria, Rwanda, Tanzania, Mozambique and Sierra Leone, are now attempting to protect this growth, fast -track it and make up for lost time. Also, African countries are looking for ways to accelerate development and meet the expectatons of their populations.

Financial institutions are making great strides in developing a range of products to match the demands of these countries. Innovation in development financing has the potential to be a determining factor for rapid, sustainable and inclusive growth over the medium term. Access to capital markets is one recent phenomenon on the African continent.

The development was boosted by the Federal Reserve’s quantitative easing policy of injecting money into the United States (US) economy. Between November 2008 and September 2013, the US Federal Reserve purchased approximately $3.5 trillion in bank debt, mortgage-backed securities and Treasury notes. As a result, capital markets were flooded with excess liquidity and unprecedented low interest rates suppressing returns in the U.S. and other developed markets.

This drove investors to emerging and frontier markets for better returns. Particularly, the response was very strong from sub-Saharan African countries. The number of international bond issuances by sub-Saharan African countries accelerated from only three issues in 2006 and 2007 to over six issues in 2013, it continued that note in 2014.

In addition to South Africa, eight countries in the region tapped the international capital markets, including first-time issuers Ghana, Gabon, Senegal, Namibia, Nigeria, Tanzania, Zambia and Rwanda. Cape Verde also issued its first international bond, while Kenya issued its inaugural euro bonds in 2014. This was on a continent where it was difficult to attract investors due to legacy issues of poor macroeconomic management and fiscal discipline as well as persistent corruption and weak institutions.

Reality of tapering
However, as the reality of tapering—a reduction of the Fed’s quantitative easing policy set in, things have since changed for most of these countries. Nigeria particularly has been most affected because of the decision of the federal government to introduce capital controls as a result of the decline in crude oil price that triggered foreign exchange crisis.
The tapering has squeezed out capital and made investors that were previously interested in Africa take a second look. Some have, however, stayed behind.

This, analysts said, is because investment opportunities exist and on average country macro-fiscal balances remain sound. Nevertheless, there has been an increase in the average cost of capital for most investors.
For example, Nigeria, Rwanda and Mozambique, who all went to market with below-investment grade sovereign ratings, will likely experience higher rates as higher risks are incorporated in the prices. This will be costly. The trade-offs between access to capital and costs will be more important and countries need to manage this transition.

Liquidity concerns
Africa stock exchanges are very concerned and are making efforts to address it. Recently, the Nigerian Stock Exchange (NSE) in collaboration with the African Securities Exchanges Association (ASEA) hosted the 5th Building African Financial Markets (BAFM) capacity building seminar themed, “Addressing Liquidity Concerns in African Capital Markets.”

That was the first time the BAFM was hosted outside of South Africa. The seminar was dedicated to fostering collaboration and knowledge enhancement among stakeholders in the African financial market.
The BAFM seminar is a capacity building initiative championed by ASEA in collaboration with its members, and it is designed to promote growth in African financial markets.

In his opening address, the Chief Executive Officer of the NSE, Mr. Oscar Onyema, noted that African capital markets are instrumental in financing the continent’s infrastructure and capital requirements.
However, he pointed out that many African stock markets are characterised by a lack of liquidity.

“This is why the topics to be discussed over the next two days by experts from Europe, Middle East and Africa are designed to build capacity around liquidity enhancement by driving new learning in the securities trading business, including information security which is increasingly a high risk area in our markets.

“In addition to being relevant to exchanges, the topics are also particularly apt for the African broker dealer community, clearing, settlement and depository (CSD), regulators, central banks and other financial institutions who will benefit from improved liquidity in African capital markets, and also by the users of derivative products that are beginning to gain attention in our markets. Indeed we have people from about 17 countries registered, “he said.
Onyema added that the decline in commodity prices, geopolitical tensions, lower Chinese growth, and the relative weakening of local currencies in Africa resulted in slower growth across a number of economies in 2015.

This, he stated, was mirrored by the performance of benchmark indices of many African exchanges, with almost all closing the year on a negative note.
“Despite the challenging operating environment in 2015, many countries in sub-Saharan Africa are expected to see a gradual pickup in growth in 2016. According to research by Thomson Reuters, African initial public offers (IPOs) are set to raise over $3.1 billion in 2016 doubling the amount raised in 2015, and the highest value raised in any year since 2010. Technology, Consumer Essentials and Industrial sectors are set to be the busiest among the 15 IPOs in the African pipeline. Now, what does this mean for us? It means that we must position African capital markets as a viable funding source for the anticipated growth, and liquidity is the key success factor to this goal.

“Sub-regional integration efforts such as WACMI in West Africa, CoSSE in Southern Africa, and EAC in East Africa are important initiatives that have the potential to unlock demand among issuers and boost liquidity. The African Exchanges Linkage Project (AELP) which is a jointly owned mandate between ASEA and the Africa Development Bank (AfDB), is also aimed at addressing the lack of liquidity in African capital markets. Thus, these initiatives are encouraged to fast-track the integration of their regional markets,” he added.

Facilitator of liquidity
Like integration, the NSE boss stressed that technology has become a facilitator of liquidity. Historically, he said the technology focus for exchanges was on execution, “however today, the focus has shifted to information services, pre trade, and post trade dimensions. Accordingly, information services, pre-trade and post-trade are where the next waves of innovation for exchanges are expected to emerge. Emerging technology such as block chain and fintech are gaining traction.

“Business models such as Uber and Airbnb who have no taxis or rooms but yet create liquidity in them, demonstrate that technology does not create liquidity on its own but instead it brings together market participants, and that leads to liquidity. In the capital markets, technology can be powerful, as it can bring very diverse market participants together as you will see in some of the sessions scheduled later in this programme.”

He added: “Building the African financial market is our collective responsibility, hence we must seek out knowledge that empower each of us to remove impediments such as outdated systems and trading practices that impede the ability of African exchanges to handle sizeable capital inflows. Evolution in local regulation is starting to increasingly provide the opportunity for pension funds to diversify their expanding portfolios beyond equity investments in traditional sectors, such as banking and oil & gas availing additional pools of funds to be traded in our markets.

“These and many more are some of the untapped opportunities waiting to be explored, and it is imperative that we are prepared to take advantage of these opportunities. Luck they say is what happens when preparation meets opportunity. Therefore, let us create and take ownership of our own luck, by engaging and participating in this rich seminar, and then proceed to leverage the knowledge in innovating, and enhancing efficiencies in our different capital markets.
“I am confident that the learnings from our interactions during this seminar will elevate our business strategies to ride out the headwinds that our markets have experienced in recent times. In the end, I hope that we are better positioned to unlock the growth potential of our economies, and are empowered to advance the development of our capital markets.”

LSE’s bold step
To address liquidity concerns in African capital markets, the London Stock Exchange (LSE) had earlier in the year set up the African Advisory Group. The group consists of prominent business personalities in Africa and its aim is to formulate policy frame work towards growing the African capital market. The LSE Advisory Group for Africa was initiated by the CEO of the LSE, Xavier Rolet.
A prominent member of the group and Chairman of Seplat Petroleum Plc, Dr. ABC Ojiakor, in an interview with THISDAY recently, described the LSE’s effort as a very novel, innovative and strategic.

According to him, “What this sets out to do is to bring senior African business persons and institutions that would sit down, interact, articulate and formulate policy frame work towards growing the African capital market which has been variously challenged over the years and this would mean that this advocacy group would have regular interactions. They are going to be the ones that will act as an advocacy group that will cut across regulatory bodies as well as the institutions for investments as well as the investors themselves. So part of the things we will be doing, will be regular interactions, formulation of approach to regulations and begin to look at ways to address the challenges that face the African capital market as well as look at ways to tap all the enormous opportunities. The ultimate goal really is to encourage prosperity in the African continent.”

Speaking on the major difficulties facing African capital markets, he said: “The African capital market is facing a lot of challenges, this was why the LSE Advisory group for Africa was put together to tackle these challenges. I think the challenges of the African capital market is very wide ranging. It ranges from very low financial capacity and debt to very low liquidity levels. And in between this spectrum, you get other things like sparse interior sectorial involvement and the rest of it. Now if you look at how these are impacting Africa that means that the volume of businesses that can be done in Africa that will have attraction to international investors is very low.

“If you look at the African continent, there are 54 countries but only about 25 of them have stock markets. Now when you look at that, only about four maybe five are active; South Africa, Nigeria, Kenya, Egypt and Morocco. The rest of them are still at the rudimentary level. Now this poses a challenge, it means that various companies and entrepreneurs in the African continent who have great ideas that can go places are unable to tap investable capital, the reason being that they are listed. Remember what I said, low capacity, finances, and low liquidity. Not being listed on the exchange means that they don’t have visibility that is required for capital flow. So this is one area that the London Advisory Group will be advising. We are an advocacy group as it were to champion bringing together likely African corporates face to face with global investors. “

Investable capital
He added that there are trillions of investable capital looking for opportunities, adding that Africa is a major frontier for growth.
He said: “But if these companies in Africa do not have the visibility and the easiest way to have this visibility is to be listed in any of the exchange. Now, that is one. The second one we stress about is the fact that we have many companies that even if they are looking out do not know how to go about it.

One of the things we are going to be doing is to have serious cooperation between the LSE and the various countries in Africa. We are looking to have three levels, one is at the country level, and the other one is regional level and then global Africa level. Also we are looking at the possibilities of how we can have intra Africa growth and integration such that you can have a corporation in West Africa for example.

“We want to do this so that where you do not have visibility of stock exchange in any particular country; they can aggregate around a more visible one like the NSE in the West African region and you can see the Kenya Stock Exchange in the East African region. South Africa is the biggest market in the south and in the North you can look at Morocco and Egypt. The real view is that a lot of entrepreneurs can latch unto this, make them visible. The LSE will create opportunities for investors to have all of these. Now one of the things we’ll look at very strongly is to look at one of the models the LSE has developed. We have what they call the 1000 companies to inspire Britain.”

This, Orjiakor stated, was championed by Xavier Rolet, adding that what it did was to create visibility for about 1000 SMEs in Britain bringing them together with investors.
Some of them, he disclosed, are growing at the rate of over 50 per cent annually but have no real experience with the investors.

He said: “Some of them are family businesses so that what this has now done is help some of them grow themselves through making themselves investable for equity capital. And when that happens a good number of them, are now migrating to become listed securities, in that process you have succeeded at making real entrepreneurs have access to capital and grow the company. Even in Europe this is a major advantage because there is still quite a high level of unemployment and this mechanism has been proven to help create jobs through entrepreneurship growth.

“Another thing we looked at is to see how we can replicate this in Africa. Part of the things the advocacy group is looking to do is to have 1000 companies in Africa to inspire growth in Africa. So we are looking at ways to adapt this method. In doing that, we also exchanged a lot of ideas about what we are already doing. If you look at a case like Nigeria, we are very clear in our minds that the informal sector in this country is wider than the organised private sector. Now we have the Director General of the National Pension Commission (PENCOM), Chinelo Anohu-Amazu as a member of the LSE Advisory Group for Africa.”

He added: “We also have the CEO of the Nigerian Stock Exchange as a member of the advisory group, one of the things that came out is that both of these have programs that are addressing the informal sectors as well as the SMEs in Nigeria. So, if we can adapt and collaborate with the LSE to see what they have done with the 1000 companies in Britain we will see how that would help. Another thing we spent quite some time doing is to listen to Sir Gilfold, I think he is the lead of the Commonwealth in the emerging market; part of the presentations he made was the Nigeria-UK co-operation. I think, in that, he had the president of the Nigerian NSE council, Aigboje Aig-Imoukhuede, as a member of his team. It all shows that these kinds of co-operations will enable growth of the capital market not just in Nigeria but in the African continent.”

He said the inaugural meeting of member happened on the 21st of March this year, adding that some of the problems facing African markets have been addressed.
Specifically, he said: “We have already looked at using the UK-Nigerian co-operation of the capital market as a model that can spread to other parts of Africa. We made a strong point and the group recognised what Seplat did being an indigenous company and then took a view in developing the African capital market ecosystem. A company like Seplat will need to play a leadership role, being a mentorship company for the rest of the companies as they come, making sure that the Seplat example can be replicated and encouraging others to participate.

“The other thing we did was to look broadly at those challenges facing the African capital market. I have talked about the debt of financial levels, I have talked about the liquidity issues, and I talked about the sectorial intensity so that the cost of business in the African capital market is encouraged. In that way we will reduce the barriers between the investing capital and the companies.”