AFRICA. and Emerging Financial Markets. Meron Demisse Robert Onah Suraj Prasannakumar

Transcription

1 AFRICA and Emerging Financial Markets Meron Demisse Robert Onah Suraj Prasannakumar November 2008

2 Financial Systems at a Glance In early 1980 s, African governments turned to IFI s as a result of economic crises, growing uncontrollable debts and failed systems Ghana, the first African country to receive assistance, "Stabilization package Structural adjustment policies intended to support privatesector growth Financial sector reform a significant part of structural adjustment visàvis economic reform African financial systems were weak and banks were nationalized Credit guaranteed inefficient use of funds exposed banks to weak portfolios Corrupt system loans given to political supporters African savings and investment rates were the lowest Government manipulation of interest rates Weak institutions, corrupt and nontransparent systems financial reform 2

3 Development of Financial Systems Development of capital markets including African stock exchanges part of financial sector reforms Stock exchanges for the most part evolved under auspices of financial sector reforms Stock markets have not been vibrant market capitalization of less than $10 billion Ghana established stock exchange under World Bank financial sector reform (FINSAP) in 1988 Ghana Stock Exchange (GSE) began trading in 1990 Establishments of Stock markets an illustration of emerging markets euphoria The African Stock Exchanges Association (ASEA) established to serve as the liaison of African stock exchanges plans underway to eventually integrate African markets Regional clusters West African franc zone, Central African franc zone, East Africa Community (EAC), Southern African Development Community (SADC) Reasons of regionalization of exchanges and regions partly a PanAfricanist, create resourceful markets, enhance efficiency and increase liquidity 3

4 Regional Integration In Africa, integration exists among regional clusters. In 1980, Southern African Development Community (SADC) was established in Lusaka, Zamia. Member states are Angola, Botswana, Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. The goal of SADC is to create a regional peace and security, and an integrated regional economy. Within the SADC region, there are 10 stock exchanges and one bond exchange. The Committee of SADC Stock Exchanges (COSSE) established in 1997 as a privatesector initiative within SADC framework. COSSE members agreed to a harmonization of respective listings regulations mentioned below. This harmonization is based on the JSE rules as fundamental framework. COSSE s mandate Improve operational, regulatory and technical foundation of SADC exchanges Increase market liquidity and enhance trading securities in various securities and financial instruments Promote development of efficient, and transparent securities markets within SADC region 4

5 West African Community Bourse Regionale des Valeurs Mobilieres (BRVM) Francophone countries. Single Market BRVM region of West African Regional stock exchange comprised of Benin, Burkina Faso, Coted Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo. Also important to note that it serves at The West African Economic and Monetary Union which acts as a single monetary unit. Primarily owned by private sector and member states own about 14 percent of the capital. BRVM established in 1998 to promote financial integration in the UEMOA region. Monetary union with single currency and central bank. No capital controls within UEMOA. No crossborder restrictions on banking and other financial services with the exception of insurance. Regional capital market includes a common interbank market single market (BRVM) for bond and stock trading fund management. BRVM single market serving eight countries within a region. UEMOA financial integration is advanced. 5

6 Foreign Direct Investment FDI into Africa totaled $36 billion in This increase was primarily allocated to extractive industries. Top ten recipient countries of foreign inflows accounted for about 90 percent in 2006 up from $20 billion in Top 10 recipients of FDI, FDI inflows to Africa increased from $6 billion in 2005 to 8 billion in Share rose from 21% to 23%. This increase was driven by high demand of mining locations as a result of world commodity price increase. Investments mainly from developed OECD and Asian developing economies Top 10 recipients of FDI, Source: United Nations Conference on Trade and Development

7 Foreign Direct Investment Ten major FDI recipients within Africa in 2006: Sudan, Equatorial Guinea, Chad, Tanzania, Ethiopia, Zambia, Uganda, Burundi, Madagascar and Mali. Major FDI contributors were from the following: CNOOC a Chinese corporation, Ophir Energy South Africa, Soma Petroleum, Canada, Range Resources and Woodside. All of these international corporations were in extractive natural and exploration industries. FDI Inflows and share in gross fixed capital formation, Source: United Nations Conference on Trade and Development

8 Foreign Direct Investment FDI flows to West Africa increased to $7 billion in 2006; regional share of 19% from 17% in Investors from European and Asian corporations. Nigeria principal destination within subregion representing 80% of FDI inflows. Investors mainly from Chinese oil seeking corporations. Ghana FDI inflows tripled $435 million. Investors from United States corporations: Newmont Gold Company and Alcoa an aluminum company. Additional inflows to other West African states primarily in service sector. FDI flows to Central Africa increased to $4 billion in 2006; regional share of 11%. Investors mainly from Asian corporations in diverse sectors; services, infrastructure and oil and mining exploration. Equatorial Guinea, Chad, Congo and Cameroon principle destinations. Investors from France in Cameroon, Total Corporation and Pecten Cameron major contributors of FDI flows into this country.

9 Foreign Direct Investment FDI flows to East Africa increased to $2 billion after period of decline; increase from $1 billion in Compared to African counterparts, East Africa ranks among lowest in FDI inflows within subregion. Djibouti, Ethiopia, Kenya and Madagascar the lowest FDI recipients recently witnessed increase in flows in Tanzania, highest FDI flow recipient within region; $377 million in Primarily attributed to expansion of mining industry. Uganda experienced 19% increase in FDI flows. Investors from Australia, Egypt, India Kenya, South Africa and Untied States; (Australia) Hardman Resources an oil corporation, and agroprocessing and services industries. Kenya, increase in FDI due to privatization sale in the telecom industry and investments in railways. Ethiopia, recent increase in FDI as a result of oil exploration in Ogaden region.

10 Foreign Direct Investment FDI flows to Southern Africa decreased in recent years to $195 million in 2006 as compared to $6 billion in 2005; South Africa and Angola culprits. South Africa inflows decreased as a result of sale of foreign equity stake in goldmining corporation to local business. Nonetheless, ongoing activities in country; Vodafone a UK corporation purchased stake in Vodacom of South Africa for $2.9 billion. Tata an Indian corporation purchased InfraCo a telecommunications company at a 26% stake (company worth $60 million.) Asian corporations Istithmar investment arm of Dubai Government purchased, V&A waterfront for over $1 billion. Angola inflows decreased as a result of acquisition from foreign corporations; Saonanglol, oil industry from Lobito oil refinery. Nonetheless, foreign investment activities are ongoing in banking, telecommunications and mining industries.

11 Sidebar Commodity Prices Oil prices have been volatile, but steadily increasing. What effect will the freefall in prices have on African exports? 100% 90% Exports/GDP 80% The relationship of commodity prices and export share of GDP is complicated due to secondary effects and poor governance 70% 60% 50% 40% 30% 20% 10% Angola Eq. Guinea Nigeria Norway 0%

12 Evolution African Stock Exchanges Bond Exchange of South Africa Botswana Stock Exchange BRVM Cairo & Alexandria Stock Exchanges Casablanca Stock Exchange DarEsSalam Stock Exchange Ghana Stock Exchange JSE Limited Khartoum Stock Exchange Libyan Stock Market Lusaka Stock Exchange Malawi Stock Exchange Mozambique Stock Exchange Nairobi Stock Exchange Namibian Stock Exchange Stock Exchange of Mauritius Stock Exchange of Swaziland The Nigerian Stock Exchange Uganda Securities Exchange Zimbabwe Stock Exchange The African Stock Exchanges Association (ASEA) established in November Facilitates and promotes products and services related to capital markets in Africa ASEA Member Countries

13 Stock Exchanges at a Glance Botswana Stock Market established in 1989; 5 listed companies became Botswana Stock Exchange (BSE) listed companies in 1999; Listed companies concentrated in financial services and manufacturing, International portfolio limited to 10% individual and 55% combined of equity stocks. Market viewed to be liquid as compared to other African markets. Indicators Total Value Traded (USD million) Total Volume Traded (million) Total Number of Transactions 2,693 4,172 6,378 Number of Listed Companies Number of Traded Companies Market Capitalization End of Year (USD billion) Market Capitalization as % of GDP Turnover Ratio (%) P/E ratio DY (%) Sectors Traded on BSE: Banking Retail, Wholesale and Consumer Staples, Property and Property Trust, Mining and Material, Health Care and Emergency Services, Security Services, Information Technology, Energy, Transport & Tourism.

14 Stock Exchanges at a Glance Ghana Stock Exchange (GSE) established in 1990; Primarily Ashanti Goldfields, and manufacturing, beverages sectors. Several listings; London, Toronto, New York and Zimbabwe. Accounts for 66% of total market capitalization. Indicators Total Value Traded (USD million) Total Volume Traded (million) Total Number of Transactions NA NA NA Number of Listed Companies Number of Traded Companies Market Capitalization End of Year (USD billion) Market Capitalization as % of GDP Turnover Ratio (%) P/E ratio NA DY (%) NA Manufacturing, Financials, Food & Beverages, Distribution/Oil, Publishing & Printing, Agriculture, ICT, Mining. Bonds Total Value Traded (USD million) , Value Traded on Government Bonds NA , Value Traded on Corporate Bonds SCB Medium Term Notes NA NA 1,390.00

15 Stock Exchanges at a Glance Johannesburg Stock Exchange (JSE) established in 1800 s primarily to raise capital for gold mining endeavors. JSE large capitalization though low liquidity. Share ownership accounts for 6 conglomerates in mining and financial holdings. FTSE/JSE Africa Index Series launched in 2002 and reclassified in 2006 FTSE/Dow Jones Industry Benchmark Indicators Total Value Traded (USD million) , Total Volume Traded (million) Total Number of Transactions 5,910,460 8,577,777 12,906,606 Number of Listed Companies Number of Traded Companies Market Capitalization End of Year (USD billion) Market Capitalization as % of GDP NA Na NA Turnover Ratio (%) P/E ratio DY (%) Sectors Traded on JSE: Automobiles & Parts, Banks, Beverages, Chemicals, Construction & Materials, Corporate Debt, Electricity, Electronic & Electrical Equipment, Equity Investment Instruments, Fixed Line Telecommunications, Food & Drug Retailers, Food Producers, Forestry & Paper, General Industrials, General Retailers, Health Care Equipment & Services, Household Goods, Industrial Engineering, Industrial Metals, Industrial Transportation, Leisure Goods, Life Insurance, Media, Mining, Mobile Telecommunications, Oil & Gas Producers, Personal Goods, Real Estate, Software & Computer Services Support Services, Travel & Leisure

16 Stock Exchanges at a Glance Nairobi Stock Exchange established in 1954; market capitalization of $ 13.1 billion at the end of December 2007, largest securities exchange in East and Central Africa. Indicators Total Value Traded (USD million) Total Volume Traded (million) Total Number of Transactions 176, , ,548 Number of Listed Companies Number of Traded Companies NA Market Capitalization End of Year (USD billion) Market Capitalization as % of GDP Turnover Ratio (%) P/E ratio DY (%) 2005 Sectors Traded: Main Investment Market Segment and Alternative Investment Market Segment.

17 Stock Exchanges at a Glance Nigeria Stock Exchange established in Lagos Stock Exchange as of Indicators Total Value Traded (USD million) Number of Listed Companies Number of Traded Companies Total Volume Traded (billion) Total Number of Transactions (million) Market Capitalization End of Year (USD billion) Market Capitalization as % of GDP Turnover Ratio (%) P/E ratio NA NA NA DY (%) Sectors Traded:Agriculture/Agroallied, Airline services, Automobile & Tyre, Aviation, Banking, Breweries, Building Materials Chemical & Paints, Commercial/Services, Computer & Office Equipment, Conglomerates, Construction, Engineering Technology, Food/Beverages & Tobacco, Footwear, Healthcare, Hotel & Tourism, Industrial/Domstic Products, Insurance, Leasing, Machinery (Marketing), Mortgage Companies, Packaging, Petroleum (Marketing), Printing & Publishing, Real EstateReal Estate Investment Trust, Road Transportation, Textiles

18 Banking System Overview Main Challenge: Access to private sector credit remains quite low. Africa s banks are characterized by low levels of intermediation, high interest rates, and wide intermediation spreads. Dismal indicators of credit efficiency must be improved. Governments must provide macroeconomic stability and productive regulation, but not control. A new ad from Standard Bank of South Africa 18

19 Bank Access is Low Country Number of branches per 100,000 people Number of ATMs pr 100,000 people GDP per capita (US$ 2003) Botswana ,290 Ethiopia Ghana Kenya Namibia ,312 Nigeria South Africa ,530 Tanzania Zambia Zimbabwe Argentina ,381 Brazil , ,492 Singapore Africa is far below international standards for bank access. South Africa is the only exception. Argentina, Brazil, and Singapore are provided as comparators here. 19

20 Banking System Depth Liquid Liabilities in System (% of GDP) 350% 300% 250% 200% 150% 100% 50% 0% Liquid Liabilities to GDP in Africa average 32%, compared to 100% in the developed world. 250% Credit Penetration Penetration (% (% of Credit of GDP) GDP) 200% 150% Credit penetration averages 18% in Africa, compared with 107% in the developed world. 100% 50% 0% 20

21 Credit Efficiency is Low Getting Credit Enforcing Contracts Ease of Doing Business Rank Rank Legal Rights Index Angola Ghana Kenya Economy Nigeria South Africa Tanzania Private Bureau Coverage (% adults) Rank Time to Recovery (days) , Out of 181 Lower is better Lower is better Out of 181 Out of 181 countries 0 10, higher is better Credit Information Index Public Registry Coverage (% adults) 0 6, higher is better Higher is better Higher is better Cost of Recovery (% of debt) While South Africa and Kenya have relatively transparent systems, overall Africa offers a difficult environment for financial intermediation. 21

22 Government Ownership of Banks La Porta, LopezdeSilanes, and Shleifer (2002) The data show that [government ownership of banks] is large and pervasive, and higher in countries with low levels of per capita income, backwards financial systems, interventionist and inefficient governments, and poor protection of property rights. Higher government ownership of banks in 1970 is associated with slower subsequent financial development and lower growth in per capita income and productivity. This evidence supports political theories of the effects of government ownership of firms. The political theory : Government ownership of firms politicizes the resource allocation process and reduces efficiency. 22

23 Significant but Incomplete Privatization Mainly Government 7% Mainly local 23% Equally shared 18% Mainly foreign 45% Structure of African Bank Ownership Foreign + Government 7% International Asset Structure 80% 60% Structure of Banks Assets 40% 20% 0% Liquid Foreign Private Sector SOE's Government 23

24 Nigeria and South Africa Domestic Credit (% of GDP) Financial Intermediations in EM s South Africa Banks have built strong deposit franchises, healthy balance sheets, and low foreign funding requirements Nigeria Costa Rica South Africa Nigeria South Africa Kazakhstan Tunisia Venezuela Lebanon Exchange Rate Regime Monetary Stance Major Policy Concern Free Floating, monitored for volatility Inflation targeting Inflation Ostensible freefloat, CB intervenes regularly Broad money (M2 targeting) Current stability 3month interbank rates have been stable even in the credit crisis. Inflationary pressure and excessive floating rate household debt pose balance sheet challenges. Basel II implementation has begun. 24

25 Nigeria and South Africa 25% NPL Ratio 20% 15% South Africa 10% Nigeria 5% 0% % CAR Ratio 20% 15% South Africa Nigeria 10% 5% % ROE 25% 20% South Africa 15% Nigeria 10% 5% Nigeria Recent true privatizations increasing macroeconomic stability following years of military leadership state control of banks. GON increased minimum capital from 2 to 25bn naira in 2005, prompting orderly consolidation to 25 banks from 89, increasing efficiency and innovation. Still a tendency to profit through rentseeking, regulatory arbitrage, and elite connections rather than lending. Overdependence of the economy on oil revenues. 25

26 What Africa Should Do Governments should regulate, NOT manage! Governments should foster credit information availability, allowing for increased microfinance, relationship lending to SME s, and retail lending. Push forward on technical innovation high fixed cost, low variable costs, high enduser benefits. Publicprivate partnerships. 26

27 Evolution of African Emerging Markets Framework for Local brokers More liquidity Experience in the region Technology Capital for development 27

28 Market Capitalization Growth In addition to Asia Pacific, growth in African market capitalization from is significantly higher than its counter parts in the US, Latin America and EuropeMiddle East. Domestic Market Capitalization (USD Billions) 25,000 20,000 12%6% 50% 15,000 33% 3% 27% 10,000 47% 5,000 41% 36% 1% 0 US Latin America 2005 Asia Pacific 2006 EuropeMiddle East 2007 Africa Source: Exchanges.org 28

29 Cross Border Equity Flows Cross Border Public Market Equity Flows As of September 2007, the market capitalization of the African Exchanges represent $1.2 trillion, about 1.89 % of global capitalization markets. Cross Border Public Market Equity Flows P % EME (1) % Africa (2) % LATAM (3) % Emerging Asia (4) ,580 2,124 2, % Total 866 1,227 2,034 2,925 3, % Sources: 1) Turkey, Russia, Poland, Czech Republic, Hungary, Israel and Greece. 2) South Africa, Egypt, Namibia, Morocco and Kenya. 3) Brazil, Mexico, Chile, Argentina and Colombia. 4) India, Malaysia, China, Thailand, Indonesia, Philippines, Pakistan, Singapore, South Korea, Hong Kong and Taiwan. 29

30 Stock Exchange Overview Turnover (US$ Billions) Market Capitalization (US$ Billions) YTD Avg. Monthly Turnover Turnover (US$ (US$ Billions) Billions) Country South Africa Inc. Date 1887 South African Futures Exchange South Africa CASE Egypt Namibia Sock Exchange Namibia Bond Exchange of South Africa South Africa Nigerian Stock Exchange Nigeria Botswana Stock Exchange Botswana Casablanca Stock Exchange Morocco Nairobi Stock Exchange Kenya Malawi Stock Exchange Malawi Ghana Stock Exchange Ghana Stock Exchange of Mauritius Mauritius BRVM 10 West Africa CFA Zone Zimbabwe Stock Exchange Zimbabwe Bourse de Tunisia Tunisia Uganda Securities Exchange Uganda DaresSalaam Stock Exchange Tanzania Swaziland Stock Exchange Swaziland Exchanges JSE Securities Exchange , , , ,

31 Open Economies Economic Liberalization Boom Technology Telecommunications Infrastructure 31

32 The Role of Private Equity in Africa Fashionable Economic Stimulant Development Tool Helios Towers in Nigeria 32

33 Types of PE Investments and Instruments PIPE Preferred Stock PE + VC Mezzanine Debt + Common Stock Options Project Finance Lease/Project Finance 33

34 Private Investments in Africa 34

35 Private Investment Analytical Framework The Team Skills? Complete? Experience? Networks? The Venture Strategy? Deal? Risk/Reward? The Opportunity Market? Product? The Context Politics? Property Rights? Infrastructure? 35

36 Problems Associated with PE in Africa Management Politics/Culture/Corruption Lack of Financing IFC involvement Exits Recapitalization IPO Strategic Sale Culture Politics Control Need to create/facilitate infrastructure Foreign Exchange Corruption 36

37 Investor Firm Relationship Private Equity Investor Financing Local Company Idea Knowledge of Sector Knowledge of Region Credibility Opportunity Network PE Comp Development PE is the future 37

38 Potential Increasing volume of equity trading Opportunity for companies to increase their revenues from flows to other exchanges through new connections and technology improvements Fastest growing capital markets Opportunity for economies to list a significant number of new companies across the region Growth of commodities and derivatives exchange Opportunity for economies to develop alternative products such as agricultural commodities and ETFs among others Regulatory environment Opportunity to provide advisory services to governments and exchanges Technologic developments Opportunity to provide electronic trading access across the world 38