Business Daily (Nairobi)
Steve Mbogo
15 November 2007
Capital markets in Africa are set to grow faster next year buoyed by new listings and growing interest from foreign investors.
The markets are expected to harness more than the Sh700 billion, which was invested in sub-Saharan African capital markets last year, according to research done by African Development Bank official, Ada Osakwe.
For the growth to be accelerated, however, market players who met in Ghana by the end of October for the 11th Africa Stock Exchanges Association Conference, say more needs to be done, including pension funds playing an institutional investors role in the continent.
Creating a strong Africa domiciled investment banking industry is another essential factor to ensure capital market rewards stay in Africa. The bond market is seen growing as more countries acquire sovereign credit ratings and float debt instruments.
Eighteen countries across the continent have got a sovereign issuer rating from at least one International Credit Ratings Agency.
In the equities markets, increasing local private and institutional participation and new issues have improved liquidity significantly, says Mr Ken Ofori-Atta, the executive chairman of Databank Financial Services.
The value of trade within the stock market outside South Africa has risen consistently from just Sh140 billion five years ago to Sh3.2 trillion last year. Mr Offori-Atta, however, says liquidity remains a big risk in Africa due to small floats and the small size of many listed equities.
Another positive trend is that stock valuations have gone up from single earning multiples a few years ago to an average of 17.4 times currently reflecting declining risk in Africa and higher growth prospects. Additionally, market capitalisation outside South Africa has risen from Sh3.3 trillion five years ago to Sh33.5 trillion currently.
The growth is boosted by strong economic recovery and improving political stability that has increased global appetite for African assets. Trends also indicate that new public equity pan-African fund managers are springing up alongside the traditional managers, an indicator of potential growth.
Growth could also be steered by the expected issuance of sovereign bonds by Kenya and Nigeria between now and next year.
The two countries are taking the cue from Ghana, which became the first sub-Saharan African country to issue a sovereign bond. Its offer of Sh35 billion in international capital markets attracted nearly seven times over, forcing it to take Sh52 billion.
The successful sale of Global Depository Receipt (GDR) by Nigerian banks on the London Stock Exchange has also opened a new window of financing for African companies.
GDRs are financial instruments used by private markets to raise money in either dollars or euros. They are used by companies from emerging markets and are traded independently of existing shares.
Mr Ofori-Atta also recommends that the continent should try to innovate how mobile phones can be used to help the rural population to participate in the capital markets.
Suntra Investment Bank managing director, James Murigu, says one of the biggest obstacles to smooth growth of capital markets in Africa has been the dominance of commercial banks as source of all types of financing.
"This is slowly changing across African capital markets as players start seeing the significance of the capital markets as an alternative source of long term financing."
In countries like Kenya, Nigeria, Tanzania, SA, Egypt, Ghana, and Botswana, more and more non-commercial bank investors are investing in the stock market.
To maintain the interest in the capital markets, players are calling for governments to maintain low and stable interest rates, low level of inflation, and stable and sustainable exchange rates.
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