Technically, an integrated regional financial market holds great potential to improve liquidity, efficiency and competitiveness of the region’s national stock exchanges. Harmonizing listing procedures generally makes the process of listing shares and raising finance in different countries easier and raises the Southern Africa Development Community (SADC) profile as a destination for all forms of investment.
The SADC Finance and Investment Protocol (FIP) encourages member states to pursue cross-market integration of their stock exchanges. As a result, in the 1990s SADC members collectively embarked on various initiatives to improve coordination and integration in the financial sector with a view to “attract capital inflows and enhance domestic savings”.
SADC recognizes the importance of capital development to achieve its goal of a “modern integrated regional economy. Deep capital markets and integrated regional financial systems can help to raise funding for SADC’s long-term infrastructure and social development programmes through stocks, bonds and other investment offerings”.
A 2019 Occasional Paper produced by Palesa Siphalana and Mopedi Moshoeshoe titled “Bridging the Divide: Integrating SADC’s Capital Markets” underscores that “an integrated regional financial market is perceived by governments as a potential instrument and mechanism for enhancing both foreign and domestic savings into investments”.
According to the paper, governments see “regional cooperation as a cost effective way for regional exchanges to overcome some of the common impediments that constrain the development or growth of smaller markets. By pooling the resources of fledgling and fragmented national capital markets, regionalization could boost liquidity and the ability of these markets to mobilize local and international capital for private sector and infrastructure development”.
International trade has evolved over the last few decades. Globalization has deepened and harmonized exchange processes, enabling an evolution from merchandise trading, such as tangible goods or commodities, to trade in services as well. Today, global trading has come to include significant activities/transactions in the finance sector.
It is reckoned that more often than not, today’s transactions involve various national jurisdictions. With deeper global integration, “the bulk of these activities increasingly occur in regional and global financial markets”.
The number of stock exchanges has grown phenomenally in the post cold war era. The World Federation of Stock Exchanges (WFE) notes that, while there were only about 50 states with stock exchanges in 1975, this number exceeded 160 in 2015 with more than 30 countries in Sub-Saharan Africa boasting their own national bourses compared to only two decades ago.
There is no denying that stock exchanges play an important role in facilitating economic development. Proponents of this position posit that “given proper regulation, security and transparency, stock markets and developments in banking tend to correlate with both current and projected rates of economic growth.
“Stock exchanges are deemed instrumental in facilitating the mobilization of financial resources by bringing together those who need capital with those who have resources to invest. The existing wisdom is that financial markets have become a crucial source or a new finance stream for driving national development, making the private sector – through banks and stock exchanges – a central player in economic development”.
The paper further observes that “capital markets are no longer just a place for big firms to raise capital, but also a place for small and medium-sized enterprises to mobilize capital to address the long-term sustainability challenges faced by small market players”.
In order to address challenges of the 21st century, economic development should be sustainable and inclusive, and it is crucial to mobilize significant financing to achieve the United Nations’ Sustainable Development Goals (SDGs), and to this end the UN in 2009 launched the Sustainable Stock Exchanges initiative.
It has been argued quite cogently in some quarters that “an integrated regional market is much bigger and more attractive investment destination that offers greater flexibility and efficiencies. Therefore, regional cooperation in the financial sector is deemed to open a realistic alternative for addressing the liquidity problems of many developing countries”.
The paper further acknowledges that “integrating national financial and capital markets into bigger entities improves their viability and enables them to compete effectively for foreign investments. Consolidating regional markets also enables domestic capital markets to have desirable poverty reducing effects in developing countries in general”.
Regional economic integration in SADC is geared towards creating larger markets with a favourable business and investment climate aimed at achieving economic growth and ultimately improving the livelihoods of citizens.
“However, the key impediment for SADC, as for many other developing sub-regions, is the fact that domestic markets are generally small, illiquid and relatively undeveloped. This provides a strong rationale for regionalizing capital markets in Southern Africa, as many are convinced that regionalization increases market size and improves operational efficiencies by streamlining activities and exploiting economies of scale. So far, the lack of liquidity and low market capitalization that characterizes SADC’s markets has been identified as a key obstacle to investment in securities”, states the occasional paper.
It is accepted as a general rule that “the harmonization of policies eliminates expensive duplications by distributing the costs across a number of economies, thereby reducing fixed costs in financial market development”, states the paper warning that “harmonizing national policies has cost implications because synchronizing various functions could include acquisition of new technologies, development of requisite skills and capacities, and new legislation by some member states”.
It is also feared that despite all the implicit benefits from integration, the cost considerations with synchronizing policies could prove to be the real hurdle for cooperation and progress among SADC members.
The paper also notes that the legal and regulatory framework for payments in individual SADC countries “is reasonably sound and could serve as the basis for developing a regional capital market”.
Another research paper produced by Sunil K. Bundoo in 2017 titled “Stock Market Development and Integration in SADC” acknowledges the fact that “the challenge for African stock markets is to increase liquidity, expand access and reduce the cost of capital”.
The research paper, that analyzed the extent of stock market integration in SADC concluded that “the stock exchanges must work towards greater integration so that they can attract more sustained portfolio flows (corporate finance flows) rather than volatile portfolio flows and also greater foreign direct investment (FDI) flows which are much needed for the financial and economic development of the SADC countries and Africa”.
It is also submitted that SADC countries cannot be complacent that with the fact that no co-integration or weak co-integration, the SADC stock markets offer good diversification benefits to US investors and elsewhere and therefore good targets for round up transactions. This is short-termism, it is warned.
“They must focus on long term where capital flows are tapped to contribute to economic development and improve welfare. There is also a need to consolidate and reduce the number of exchanges with the view to improve market capitalization, liquidity, market infrastructure, governance amongst others but most importantly to increase the visibility, robustness and reputation of SDAC stock markets at the international level”, the paper argues.
The paper also notes that although some progress has been made in deepening financial instruments in Africa in recent years, there is still a lot to be done. Most financial instruments continue to be concentrated at the short end of the term structure.
Consequently, lending rates remain very high and spreads are large. Moreover, there is lack of involvement by domestic investors. The stock markets in SADC, except for a few, exhibit same characteristics.
In view of promoting financial market development within the SADC region, it is accepted that there is need to: integrate and consolidate SADC financial markets; to facilitate the access the information and its free flows; to harmonize the regulatory and legislative frameworks for stock market and listing of securities operations; and to speed up the implementation and monitoring of the Financial and Investment Protocol (FIP).
The main aim of the FIP was to inform US based institutional investors of the investment opportunities offered by African stock exchanges. Forums such as these could help African participants to show case some of the high-performing companies listed on their countries’ exchanges, while also drawing attention to the need for more public-private-partnerships between large international companies, African SMEs, and international donors, to nurture nascent African private sectors to grow, create jobs and contribute to economic growth.
The African Development Bank (AfDB) in 2013 acknowledged that South Africa and to some extent Mauritius have emerged as significant sources of investment into other SADC countries. Some other countries can also become significant regional investors while others may become major recipients of SADC investment. Such a trend needs to be encouraged in order to develop the industrial base of the SADC countries.
“Greater regional stock market integration can make SADC countries compete better for international capital which is much needed for the economic development of these countries”, it is argued by the study which seeks to determine the extent of integration of the SADC stock markets and how much has to date been achieved.
“Regional integration, if carried out at the right pace and in a pragmatic way, could improve the liquidity, efficiency, and competitiveness of the region’s stock exchanges. Cooperation and integration of national stock exchanges could offer a way of overcoming some of the impediments to development that most of the African stock markets now face as relatively fledgling and illiquid exchanges”, states the research paper.
It is observed that on a proper balance, “the benefits of regional stock market integration tend to outweigh the costs; yet the progress towards integration for African stock exchanges has been rather slow” and therefore “more concrete action on the ground and greater political commitment with respect to the stock market integration and do nothing is not an option”.
According to the research study, SADC countries need large amounts of financing to build infrastructure for sustained growth. Capital markets are needed as an alternative source of financing, supplementing commercial banks. Recognizing the benefits of capital markets and the limitations of individual country approaches, the creation of regional stock exchanges can help significantly for a quantum leap in harnessing much needed capital to the African countries.
The study further notes that “stock markets in Africa have received little attention due to underdevelopment and illiquidity of the markets. However, there have been considerable improvements, rapid and liberalization in a number of African countries stock markets”.
For most African stock markets, market capitalization as a percentage of GDP is still very low, below 50 percent for 11 out of 15 of the exchanges on which data is available. So, African stock markets suffer from depth; though the situation has improved.
Liquidity is a major problem, illustrated by low turnover ratios. Although most countries have conducted domestic retail investor awareness campaigns, stock exchanges investment is out of reach for the majority of the population.
The other African stock markets are characterized by long periods of inactivity broken only with occasional small listings, mostly from privatized state owned enterprises or foreign multinationals. The turnover ratios are low for most markets.
“Though there have been significant improvements in market infrastructure to facilitate trading for some stock exchanges such as Mauritius, South Africa, Nairobi, Botswana etc. , same cannot be said about all of them. International fund managers are crucially important to African stock markets but are cautious given their limited size and activity”, it is argued though admitted on the downside that “African stock markets have performed remarkably well in terms of absolute returns”.
It is further accepted that that “there is a pressing need to promote regional stock markets in order to benefit from economies of scale and improve market infrastructure and liquidity”, and it is evident that “African stock markets are not well integrated with each other. There are weak stochastic trends between African markets and the rest of the world, indicating that Africa’s markets tend to respond local rather than global information”.
Although the weak trends present an opportunity for portfolio diversification into African markets, the risk perception and the institutional underdevelopment remain obstacles to the development of Africa’s emerging equity markets.
The anticipated regional integration will also make African markets more visible at the international level and in competing for portfolio flows. By having more efficient markets this will also help attract more FDI flows.
A number of initiatives have been undertaken to integrate African stock exchanges. The markets are working towards a pan-African stock exchange through the African Stock Exchanges (ASEA) and integration with the world economy.
All markets are open to foreign investments and have implemented free market reforms. There have also been various common policies, such as harmonizing trading practices, encouraging cross-border listing of shares, developing computerized trading systems and promoting greater inter and intra regional trade.