How capital market development can help shape Africa’s future
African nations are intensifying their efforts to develop liquid capital markets that can act as a funding platform for infrastructure projects and growing businesses.
South Africa is the biggest, most advanced and diversified economy in Africa. It also dominates regional equity market capitalization, at around USD1.2 trillion. Morocco trails far behind in second place with USD76 billion, while Africa’s second biggest economy, Egypt, has USD47 billion.
On the surface, South Africa’s market capitalization compares favorably with even those of developed countries with similar sized populations but much larger economies — like Italy, where total market cap is USD747 billion. But much of South Africa’s equity market represents offshore business activity: the biggest stocks by market cap on the Johannesburg Stock Exchange (JSE) are secondary listings of multinationals.
In Nigeria, Africa’s most populous country and one of its biggest economies, the stock market “does not reflect the entirety of the economy,” said Dave Uduanu, CEO of Access Pensions, Nigeria’s second largest pension fund administrator. He notes that many of the country’s big companies are not listed, including Africa’s biggest oil refinery, Dangote, and two of Nigeria’s big telcos.
It is a similar story in most of Africa’s 29 stock exchanges. Because of their small size, they play a limited role in channeling much-needed funding towards the continent’s infrastructure development and business expansion.
Improving Africa’s stock markets would also make it easier for investors around the world to gain exposure to the opportunities created by the continent’s economic growth. And by providing more exits for early-stage investors, this could fuel further growth in the region’s increasingly vibrant venture capital and private equity ecosystem, said Ayman Abouhend, Chief Investment Officer at Significa Ventures.
Lacking depth and liquidity
As it stands, Africa’s equity markets are generally “small, with low liquidity and few listed securities,” said Sonia Essobmadje, Chief Innovative Finance and Capital Markets at the United Nations Economic Commission for Africa (ECA). “The bond markets also suffer from low liquidity, as well as limited benchmarks for pricing securities. More importantly, government issuances dominate the bond markets, crowding out private issuances,” she said.
The Absa Africa Financial Markets Index 2024 tracks the development of 29 African countries’ financial markets, with scores given for six pillars: market depth; access to foreign exchange; market transparency, tax and regulatory environment; pension fund development; macroeconomic environment and transparency; and legal standards and enforceability (see Figure 1).
While South Africa scores 100 for market depth, which evaluates liquidity, the diversity of listed assets and the ease of trading, Ethiopia, Lesotho and Zimbabwe score just 10, 12 and 16, respectively.
Legal standards and enforceability are also in need of further development. South Africa and Mauritius score 100, but Botswana, the Democratic Republic of Congo, Eswatini, Ethiopia, Lesotho, Madagascar, Rwanda and Seychelles all score 10.
Turning the tide
With a view to strengthening domestic resource mobilization and contributing to development financing, the African Union has prioritized the development of capital markets on the continent in its Agenda 2063 blueprint entitled “The Africa We Want.” The ECA has made this issue an essential part of its work program, creating a section tasked with supporting member states in developing their capital markets.
Essobmadje said that this is reflected in a newfound political will. “Compared to a few years ago, capital markets and, more generally, access to finance have become a priority, because development is not possible without financing. That’s why this agenda will probably move faster than people think,” she said.
Opening the door to more local currency financing in domestic capital markets can also enhance economic resilience, said Abouhend. Many countries depend heavily on foreign debt, most of which is denominated in US dollars. The likes of Egypt and Angola experienced steep increases in external debt in 2023 as a result of sharp currency depreciation.
There have been powerful examples of companies using capital markets in the region to fund their growth ambitions. For example, Abouhend said that when South African mobile network operator MTN raised funds on the Johannesburg Stock Exchange to invest and make acquisitions throughout Africa, not only did it hasten vital infrastructure development across the continent, but it also led to “a knowledge transfer”, spreading awareness of the how capital markets can help fuel companies’ rapid expansion.
Liquidity begets liquidity
One of the ways in which Africa’s capital market development could be accelerated is by integrating the capital markets of separate African nations, “creating one big pool to raise funds for acquisitions, launching startups and developing infrastructure projects,” said Abouhend.
The African Stock Exchange Association and the ECA have been working on several initiatives to enable integration and dual listings between various regional exchanges, he added.
Essobmadje said that the linking infrastructure had already been established at the sub-regional level, ahead of expanding these links to the regional level. Obstacles remain before these links can support significant trading volumes, however, including the harmonization of trading rules and regulatory frameworks.
As improvements gather pace, listings pick up and markets deepen, Africa’s pension and sovereign wealth funds may start increasing their allocation to local equities, said Uduanu. To get the ball rolling, he suggested that pension funds, which have grown impressively in several African countries (Figure 2) and are the continent’s biggest institutional investors, could “lead the way by making increased allocations to equities.”
When Nigeria last undertook pension reform in 2004, “the focus was largely on mobilizing capital for fixed-income investment,” Uduanu said. But given high rates of inflation, bonds have become less attractive.
As a result, according to Lamido Yuguda, who has previously served as the Director General of Nigeria’s Securities & Exchange Commission and a Director at the Central Bank of Nigeria, is that “there is now a process of looking at equities again.”
Meanwhile, in a move that would mirror the integration of different countries’ capital markets, Uduanu said that capital market development could also be spurred through the creation of pan-African investment vehicles, which could enable more pension funds to invest domestically.
A case in point is Botswana, which has pension assets of around USD10 billion as of 2023, but a population of just 2.7 million and equity market capitalization of USD3.8 billion. This gives the country’s pension funds relatively limited options for investing locally, especially if they wish to be well diversified.
In addition, there is considerable potential for the privatization of government assets to fuel listing activity in the years ahead and increase market depth. Doing so can improve governance, which can ultimately benefit owners, employees and economies.
Abouhend explained that this happened in Egypt, when investors from the UAE, Saudi Arabia and Qatar started buying into companies that were privatized by the Egyptian government. “After foreign investors came in, these entities were better governed, saved costs and became more focused on top-line growth.”
Education is key
Yuguda noted that Nigerian pension funds’ allocation to local equities had been higher until the market crash of 2008–2009, after which Nigeria’s equity market was very slow to recover. “A lot of investors — institutional pension funds and also retail investors — got burned during the crash and essentially stayed out of equity markets for some time,” he said.
This highlights the importance of education. “If you have an informed population, that really understands when to invest, where to invest, how to invest, and what to expect, then you really will build in more resilience within capital markets, because certain types of performance should then not come as a surprise,” said Yuguda. “These kinds of investors may look at a market downturn as an opportunity for market entry rather than a reason for market exit.”
Education must also extend to informing companies of the benefits of participating in capital markets. Essobmadje said that while several of the continent’s stock exchanges had undertaken initiatives to encourage micro, small and medium enterprises (MSMEs) to list, with some even making it free of charge.
It is not always easy to convince them to do so. “Not so many enterprises are interested, because, of course, being listed implies transparency and the application of strict corporate governance and reporting rules,” said Essobmadje. “Listed companies need to be rigorous in the way they report financial statements, and they need to be audited.”
It does not help that because markets are performing so poorly, owners see little benefit in raising additional capital at such low valuations. But that will change if capital market development gains traction, drawing liquidity and boosting valuations.
It is also important to simplify procedures, enhance infrastructure, and emphasize the benefits of a listing, said Essobmadje. "We need good stories about companies that have been listed – the journey and the challenges and how they actually managed to benefit from it.”
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