22 April 2014

Tanzania Set to Relax Its Rules On Capital Controls

THE Dar es Salaam Stock Exchange (DSE) is set for thriving business and huge expansion as the government plans to increase participation of foreign investors in the listed equities and allow them to buy government bonds.

The DSE Chief Executive Officer, Mr Moremi Marwa, told 'Business Standard' on Friday that easing controls on participation of foreign investors would lead to more vibrant business at the bourse with anticipated rise in demand for government securities and listed stocks to lead price discovery of listed equities.

"This implies that there will be increased demand for these securities... this will mean better price discovery and valuations on listed stocks which are currently considered undervalued relative to other regional and sub-Saharan Africa exchanges," he said.

"The immediate impact will be seen in increased demand for shares which will help them gain more value..." he said. President Jakaya Kikwete said last week that restrictions that bar nonresidents from buying the nation's bonds and block companies that are more than 60 per cent owned by foreigners from trading on DSE will be eased under East African Community (EAC) rules.

A common market agreement by the five-nation bloc, which includes Kenya and Uganda, calls for liberalisation to take place by 2015.

"There is some liberalisation going on, but by 2015 we are going to be fully liberalised. Our people at the central bank have given me the assurance that we will meet that deadline," President Kikwete was quoted as saying.

The DSE chief said more liberalisation of the stock market by increasing the participation of foreign investors would lead to a more vibrant market. It would also lead to a reduction of lending rates by banks and financial institutions to the private sector, he said.

"On the bonds this will also mean increased demand for these securities and hence better prices. This initiative will allow results into more vibrant secondary bonds market at the DSE. "The reduced yields will also facilitate reduction of lending rates by financial institutions (particularly banks and microfinance institutions) to the private sector as loan products are normally priced based on government securities as benchmarks and risk premium."

"Low borrowing rates by business enterprises will result into business growth, more job creation and economic development," he said. Under the current framework foreign investors are allowed to purchase only up to the maximum of 60 per cent of shares floated at the market while the remaining 40 per cent is reserved for local investors.

Foreign investors are also not allowed to buy government bonds. Foreign participation in the Nairobi Stock Exchange is about 85 per cent while in Uganda is 100 per cent, thus putting the bourses in the position to attract substantial investments from outside the country.

The relaxation of capital controls coincides with the government engaging Fitch Ratings and Moody's Investors Service to rate the country's long-term risk ahead of its debut Eurobond offering.

Tanzania plans to use proceeds from international bond sales to build roads, boost power generation and refurbish the nation's railways as it strives to reach middle-income status by 2025.

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