A directional view Cross-border securities trade between SADC countries. A report by The Economist Corporate Network

Transcription

1 A directional view Cross-border securities trade between SADC countries A report by The Economist Corporate Network

2 The world leader in global business intelligence The Economist Intelligence Unit (The EIU) is the research and analysis division of The Economist Group, the sister company to The Economist newspaper. Created in 1946, we have over 7 years experience in helping businesses, financial firms and governments to understand how the world is changing and how that creates opportunities to be seized and risks to be managed. Given that many of the issues facing the world have an international (if not global) dimension, The EIU is ideally positioned to be commentator, interpreter and forecaster on the phenomenon of globalisation as it gathers pace and impact. EIU subscription services The world s leading organisations rely on our subscription services for data, analysis and forecasts to keep them informed about what is happening around the world. We specialise in: Country Analysis: Access to regular, detailed country-specific economic and political forecasts, as well as assessments of the business and regulatory environments in different markets. Risk Analysis: Our risk services identify actual and potential threats around the world and help our clients understand the implications for their organisations. Industry Analysis: Five year forecasts, analysis of key themes and news analysis for six key industries in 6 major economies. These forecasts are based on the latest data and in-depth analysis of industry trends. EIU Consulting EIU Consulting is a bespoke service designed to provide solutions specific to our customers needs. We specialise in these key sectors: Consumer: Providing data-driven solutions for consumer-facing industries, our management consulting firm, EIU Canback, helps clients to enter new markets and deliver greater success in current markets. Find out more at: eiu.com/consumer Healthcare: Together with our two specialised consultancies, Bazian and Clearstate, The EIU helps healthcare organisations build and maintain successful and sustainable businesses across the healthcare ecosystem. Find out more at: eiu.com/ healthcare Public Policy: Trusted by the sector s most influential stakeholders, our global public policy practice provides evidence-based research for policy-makers and stakeholders seeking clear and measurable outcomes. Find out more at: eiu.com/publicpolicy The Economist Corporate Network The Economist Corporate Network (ECN) is The Economist Group s advisory service for organisational leaders seeking to better understand the economic and business environments of global markets. Delivering independent, thought-provoking content, ECN provides clients with the knowledge, insight, and interaction that support better-informed strategies and decisions. The Network is part of The Economist Intelligence Unit and is led by experts with in-depth understanding of the geographies and markets they oversee. The Network s membership-based operations cover Asia-Pacific, the Middle East, and Africa. Through a distinctive blend of interactive conferences, specially designed events, C-suite discussions, member briefings, and high-calibre research, The Economist Corporate Network delivers a range of macro (global, regional, national, and territorial) as well as industryfocused analysis on prevailing conditions and forecast trends. About the author Herman Warren is ECN s Africa Director. He is the author of a number of white papers on infrastructure, financial and commercial developments in the African region.

3 Contents Executive summary 2 Stock exchanges: quantitative data 3 Mauritius 3 Mozambique 4 Brokers: quantitative data 6 Obstacles to SADC inter-country trade 8 Exchanges view 8 Brokers view 8 Brokerage firms without skills base and capacity 8 Limited product range and lack of liquidity 8 Lack of harmony: regulations and trading systems 8 Use of multiple currencies increases cost 8 Counter-productive government intervention 8 Balance of payments 9 Conclusion 11 1 The Economist Corporate Network 217

4 Executive summary The Committee of SADC Exchanges ( CoSSE ) commissioned The Economist Corporate Network (ECN) to conduct a study among the 13 member exchanges of CoSSE to determine the absolute number, mix and value of securities trade that originated and concluded between countries in the SADC region ( cross-border trade ) in ( the period ). The approach envisaged was to rely on member exchanges to populate a standardised template with transaction information for each year over the period. The information provided by exchanges would then be analysed and supplemented by qualitative interviews with brokers active in the SADC region. However, only two exchanges Mauritius and Mozambique were in a position to provide detailed information on cross-border trade. The information provided was useful, but the two exchanges accounted for less than 1% of the region s total market capitalisation. Moreover, not one of the five brokers contacted and active in the region was able to provide a comprehensive and quantitative overview of the cross-border trade facilitated for their respective retail and institutional clients over the period. In order to gain a comprehensive picture of the level and source of cross-border trade, an alternative approach involving proxy information was leveraged. The best primary source of information turned out to be the balance of payments information kept by the national banks of countries in the SADC region. The South African Reserve Bank and the Bank of Zambia published the most useful statistical tables in this regard. However, the national banks of some of the other regional countries (e.g. Lesotho) included useful, albeit incomplete, indicators relating to numbers contained in the two primary national bank sources. The balance of payments data indicate that at the end of 215 around 92% of portfolio value was held in two countries. Over 75% or US$4.5bn out of the US$5.9bn of listed securities crossborder-portfolio value was held in South Africa. The next largest country by listed-securities value Mauritius accounted for around 17% or US$995m. The largest sources of regional investment (i.e. funds flowing from one SADC country to another) were Namibia (US$3.8bn or 64% of total portfolio value) and South Africa (US$1.45bn or 24% of total portfolio value). It is noteworthy that all of Namibia-sourced portfolio funds are believed to have flowed to South Africa, facilitated by common trading systems, pegged currencies and a supportive regulatory environment. The majority (US$1.4bn) of cross-border portfolio value emanating from South Africa was invested in Mauritius (US$995m) and Namibia (US$28m). The brokers who were interviewed by ECN indicated that cross-border trade within the region is low by volume and value. The one exception appeared to be the flow between Namibia and South Africa, with the former driving most of the transactions by value into the latter. Brokers cited a number of issues, including incompatible systems, multiple currencies, as well as rules and regulations that militate against greater trade, not only between, but also in some cases within, CoSSE countries. 2 The Economist Corporate Network 217

5 Stock exchanges: quantitative data Two exchanges Mauritius and Mozambique provided detailed information of trades by type, volume and value over the period. Lesotho indicated that it hadn t started trading and therefore had no information to provide. The Stock Exchange of Zimbabwe indicated that no cross-border trade had occurred in the period. All the other exchanges either indicated that they were unable to provide the information requested or did not respond to ECN s information request. Over the period around 2,7 cross-border transactions occurred on the country s stock exchange. All but 37 of these transactions were attributable to the purchase of equities. Mauritius The Stock Exchange of Mauritius: cross-border trading volume by securities type, (no.) 1,2 1, Equities Bonds 1,2 1, Sources: ECN analysis; The Stock Exchange of Mauritius. The Stock Exchange of Mauritius: cross-border trading value by securities type, (US$ ') 1, Equities Bonds 1, 8, 8, 6, 6, 4, 4, 2, 2, 214 Sources: ECN analysis; The Stock Exchange of Mauritius The Economist Corporate Network 217

6 The value of concluded trades over the period totalled around US$173m. 215 was the outlier: around 8% (US$46m) more value traded in this year compared to the average dollar value was traded in 214 and 216. The average amount per transaction was around US$63k. South Africa and Seychelles were the primary sources of trade cited by the exchange. The Stock Exchange of Mauritius: cross-border trading value by source, (US$ ) Botswana South Africa Malawi Seychelles Zimbabwe Average value of trade ($63,426) 1, 1, 8, 8, 6, 6, 4, 4, 2, 2, 214 Sources: ECN analysis; The Stock Exchange of Mauritius Mozambique Mozambique Stock Exchange: cross-border trading volume by securities type, (no.) 5. Equities Bonds Sources: ECN analysis. Mozambique Stock Exchange The Economist Corporate Network 217

7 The Mozambique Stock Exchange indicated that there were 73 cross-border transactions over the period. All but one of these transactions was related to equity trades. Mozambique Stock Exchange: cross-border trading value by securities type, (US$ ) 1,4 Equities Bonds 1,4 1,2 1, ,2 1, Sources: ECN analysis; Mozambique Stock Exchange. However, the bulk of the cross-bordertrade value was attributable to a single bond transaction in 216 of US$1.2m. The average amount per transaction was around US$21k, including the outlying 216 bond transaction. South Africa was cited as the only source for equity transactions over the period, and Mauritius was cited as the source for the sole bond transaction. Mozambique Stock Exchange: cross-border trading value by SADC source, (US$ ) 1,4 215 South Africa Mauritius 216 Average value of trade ($2,692) 1,4 1,2 1,2 1, 1, Sources: ECN analysis; Mozambique Stock Exchange. 5 The Economist Corporate Network 217

8 Brokers: quantitative data Standard Bank Group Securities ( SBG ) was the only brokerage that provided a detailed breakdown of trades facilitated for the firm s clients in the SADC region. The trading information provided by SBG includes equity trades only. Standard Bank Group Securities Equity trading: value of trades by Namibia-based investors purchasing in South Africa (US$ ) 35, 35, 3, 3, 25, 25, 2, 2, 15, 15, 1, 1, 5, 5, Source: Standard Bank Standard Bank Group Securities Equity trading: value of trades by South Africa-based investors purchasing in SADC (US$ ) 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Source: Standard Bank. 214 Botswana 215 Mauritius Zambia Zimbabwe 216 Tanzania 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, 6 The Economist Corporate Network 217

9 Over the period the bulk of equity trades by value (around US$61m) resulted from Namibiabased investors purchasing securities on the Johannesburg Stock Exchange. SBG facilitated around US$29.4m in equity trades for South Africa-based clients on other exchanges in the SADC region. Around 49% (US$14.4m) was directed to Zimbabwe-based equity purchases. Thirty-five percent (US$1.4m) was directed to Botswana-based equity purchases. Ten percent (US$3m) was directed to Tanzania-based purchases. The remaining 6% of purchases facilitated by SBG were spread across Mauritius (4%) and Zambia (2%). Around US$18m or 61% of the total trade that SBG facilitated in the region for their South Africa-based clients took place in The Economist Corporate Network 217

10 Obstacles to SADC inter-country trade Exchanges view A number of exchanges, including those that did not fully complete the standardised template, indicated issues that inhibit trade between countries in the region. The five main issues cited as hindrances to trade were the following: 1. Exchange controls (Zimbabwe Stock Exchange indicated exchange controls in their domestic market constrained trading. Mozambique Stock Exchange reported it to be a problem across the region.) 2. Liquidity for settlement (Zimbabwe Stock Exchange indicated a lack of liquidity in their domestic market constrained trading.) 3. Use of different currencies (Mozambique Stock Exchange reported this to be a problem across the region.) 4. Unsupportive legislation (Mozambique Stock Exchange reported this to be a problem across the region.) 5. Different compensation cycles (Mozambique Stock Exchange reported this to be a problem across the region.) 6. Foreign-offer IPO restrictions (Highlighted by Namibia Stock Exchange.) Brokers view Four brokers with operations in the SADC region were interviewed: IJG Securities (Namibia) Investec (South Africa) Momentum (South Africa) TIB (Tanzania) All of the brokers indicated that cross-border trading volumes are low in SADC and the broader African region. The brokers cited a range of issues that inhibit cross-border trade: Brokerage firms without skills base and capacity Local brokerage firms don t have the right infrastructure, systems, applications or algorithms. Limited product range and lack of liquidity Most of the exchanges are very thin in terms of product range. For example, in Tanzania there is only unit trusts that are owned by the government. Poor liquidity is a recurring theme. Zambia is a case in point; one of the blue chips listed on their exchange fell 85% due to poor liquidity. Lack of harmony: regulations and trading systems Differences in the settlement process complicate matters. In order for this to work, taxes and charges need to be reduced. If there were a common link in system usage across SADC, that would make it easier to trade. Use of multiple currencies increases cost Currency conversions are on a very wide spread between countries. One can really only use US dollars, and trading becomes expensive. Counter-productive government intervention The political and economic interference in the stock exchanges is problematic; the markets are not allowed to determine outcomes. The biggest issue is that people can t take money out of countries, which smashes confidence. 8 The Economist Corporate Network 217

11 Balance of payments The balance of payments ( BOP ) is a record of a country s international transactions. BOP transactions are classified into two accounts: the current account and the capital account. The latter mainly includes transactions classified as portfolio investment. Portfolio investments in reserve or national bank accounts indicate the value at a specified date for a range of asset classes such as stocks, government bonds, corporate bonds, exchange traded funds and other instruments that typically trade on a stock exchange and that nationals in a country have purchased in another country (i.e. assets or outflows), or that the country has received from nationals in another country (i.e. liabilities or inflows). The published reports of reserve/national banks of all countries in the SADC region were reviewed for an indication of the portfolioinvestment inflows and outflows. The reports from the South African Reserve Bank and the Bank of Zambia provided the most useful detail and form the primary basis for regional BOP findings. Africa-sourced balance of payments: cross-border portfolio in country, 215 (US$ m) 7, 7, 6, Mauritius Namibia Mozambique Zambia Zimbabwe Africa other 6, 5, 4, South Africa 5, 4, 3, 3, 2, 2, 1, 1, Sources: South Africa Reserve Bank, Annual Report 216; Bank of Zambia, Private Investor Perceptions Zambia 216; ECN analysis. Among countries in SADC and the broader African region, the three countries held around US$5.7bn or 96% of portfolio investments. South Africa on its own held around 76% (US$4.5bn) of total incoming portfolio investment from African foreign nationals. Mauritius and Namibia held around 17% (US$995m) and 4% (US$28m), respectively, of total incoming portfolio investment from African foreign nationals. Over 84% of incoming portfolio flows to South Africa were sourced from Namibia. 9 The Economist Corporate Network 217

12 South Africa & Mauritius* Africa-sourced balance of payments: in-country portfolio value by out-of-country investment source, 215 (US$ m) 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 South Africa Botswana Namibia South Africa Swaziland Mauritius SADC region portfolio investment value by source country, 215 (US$ m) Zambia Mauritius Lesotho Africa other *Bank of Mauritius (the central bank) doesn't provide figures by SADC country. SADC number attributed to Mauritius includes only those provided by South African Reserve Bank for South Africa. Sources: South Africa Reserve Bank, Annual Report 216; Bank of Zambia, Private Investor Perceptions Zambia 216; ECN analysis. 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 7, 6, 5, South Africa Swaziland Botswana Lesotho Africa other Mauritius Zambia 7, 6, 5, 4, Namibia 4, 3, 3, 2, 2, 1, 1, Sources: South Africa Reserve Bank, Annual Report 216; Bank of Zambia, Private Investor Perceptions Zambia 216; ECN analysis. According to figures from the South African Reserve Bank and Bank of Zambia, Namibia was the largest source of portfolio inflows in the region, with its nationals portfolio valued at US$3.8bn or around US$2.4bn more than that held by nationals of the next closest country South Africa. 1 The Economist Corporate Network 217

13 Conclusion triangulation of data sources suggests that A cross-border trade over the period has been inconsistent and relatively low in terms of both value and volume. The exceptions may only be between Namibia and South Africa and between Mauritius and one or two other countries in the region (e.g. South Africa and Seychelles). Where trade is happening more consistently (e.g. between Namibia and South Africa), it is being facilitated by systems, regulations and frameworks that are conducive to trade. Notwithstanding, even in the case of the relatively large and consistent cross-border trade between Namibia and South Africa, it is telling that the exchanges in each of these countries were unable to provide detailed information on the specific types and associated value of trade that are requested by their nationals in the other country. Perhaps in this instance the old adage If you can t measure it, you can t manage it is applicable. Clearly, work is required at government, regulatory, exchange and intermediary levels in order to realise the full potential of cross-border trade. 11 The Economist Corporate Network 217

14 About The Economist Corporate Network The Economist Corporate Network is The Economist Group s advisory service for senior executives seeking insight into economic and business trends in their key growth markets. Independent and thought provoking, The Economist Corporate Network provides clients with the information, insight and interaction they need to succeed. It is led by experts who share a profound knowledge and understanding of business issues. It has regional business groups across Asia Pacific, the Middle East and Africa. Through its tailored blend of interactive meetings, high-calibre research and private-client briefings, The Economist Corporate Network delivers country-bycountry, regional, global and industry-focused analysis on both current and forecast conditions. 12 The Economist Corporate Network 217

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