Is a pan-African bourse feasible?

Absa CEO, Maria Ramos, speaking at the Fortune/Time/CNN Global Forum in Cape Town this week, was quoted as saying that Africa’s stock exchanges are too fragmented and many of them suffer from low liquidity, which may point to the need for a single pan-African bourse, to try and rationalise their operations and improve their viability.

A trader at the Zimbabwe Stock Exchange

A trader at the Zimbabwe Stock Exchange

While we agree that liquidity is an issue and has been an impediment to particularly, foreign fund flows, in some of the smaller markets such as Malawi and Uganda, and as such the number of brokers in some of these markets is perhaps not justified, we think the creation of a single bourse would be a bit premature at this stage.

The sub-Saharan Africa “frontier markets” as they are categorised by investors, are in a state of evolution, nascent as it may be, and we believe rather than there being a pan-African integration, the push should be on the local exchanges to encourage more local listings first, by educating their local business people on the value of raising capital on the equity markets and pursuing growth through that medium.

100% ownership is still viewed as an ideal by many entrepreneurs, and a paradigm shift is required towards reduced ownership of a bigger cake as opposed to total ownership of a smaller one. The equity markets also provide an easy avenue for the privatisation of Africa’s many state-owned enterprises, and again, the listing of these should be encouraged.

The above aside, politically it would be difficult to create a pan-African exchange, as the Johannesburg Stock Exchange (JSE) discovered when it mooted the idea to other bourses. The concern from the smaller exchanges has always been that given its much larger size, sophistication and depth, trades would naturally flow through the JSE where any pan-African bourse would likely be housed, to the detriment of the local exchanges, and thus the concept met resistance. Hence the creation of the  JSE’s Africa Board, which seeks to rather encourage secondary listings as opposed to bourse migration/integration, though even this has been met with an element of resistance.

IMF statistics show that between 2002 and 2007, the sub-Saharan Africa exchanges showed strong development, their value (market capitalisation) nearly doubling to 153% of GDP before dropping to 83% of GDP in 2008 as the global financial crisis took hold.

We believe the recovery of global markets will lead to momentum returning, and with appropriate reforms, the markets will be able to reach critical mass in the future. Then the natural next step would be for regional integration (West Africa already has the BRVM, while East Africa has set the course for its own regional market), and perhaps following from that, an inclusive pan-African trading platform.

Article written by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.