African exchanges’ growing pains

Regional integration and investor appetite are driving IPOs, but corporate governance issues remain. 

Perched above a spectacular Zambezi gorge and fitted out with tennis courts, swimming pools and a library, the Victoria Falls hotel has long been a destination of choice for Zimbabwe’s business class. But executives from the Zimbabwe Stock Exchange might have to get used to a decidedly cooler welcome following news that the hotel’s owners, Meikles, are suing the bourse for $50m in lost earnings following their week-long suspension from the exchange in February.

The unseemly spat over Meikles’ status – the exchange had accused the company of overstating a debt owed by the central bank – illuminates the uncertainties that can afflict investors in African capital markets at a time when the continent’s stock exchanges are undergoing rapid expansion and welcoming new sources of capital from around the world.

In a recent report on African equity capital markets, PwC said that Africa attracted $11bn in initial public offerings and follow-on capital in 2014 – equal to the combined money raised in the previous two years. The breakneck pace of developments, illustrated by a doubling in the value of the Rwandan stock exchange after February’s cross-listing of Kenya’s Equity Bank, has led to a new era of confidence among exchange executives and regulators alike.

However, questions remain over whether some of the continent’s smaller exchanges have the capacity to deal with major IPOs, the relationship with powerful listed companies, and the expected influx of capital.

Ibukun Adebayo, co-head of emerging markets in equity primary markets at the London Stock Exchange, says that some of the continent’s emerging countries still have to improve their regulation around exchanges if they are to become attractive investment destinations. 

“Those exchanges have a lot of work to do to attract the level of capital required to fund the various equity stories that are emerging in those regions’ they have a lack of financial depth in those markets and this is due mainly to policy gaps and regulatory issues that exist or are still not plugged,” he says.

Adebayo cited as concerns a lack of disclosure, incomplete information for investors, broker risk and insider trading.   

“All of these are restrictions on the flow of capital into those markets, but these are ultimately issues they are aware of, and ultimately they are fixable with the right commitment and the right enabling environment to do that,” he adds.

Robert Mathu, executive director at Rwanda’s Capital Market Authority, argues that exchanges across Africa are working hard on building an enabling environment by expanding capacity, formulating effective regulation and pursuing technological change.

“Most of the exchanges in sub-Saharan Africa have put in place capacities that are even beyond the sizes or the potential of their markets. Therefore for now, with the capacities at the moment, they can be able to manage the inflow of new IPOs up to a certain level,” he says.

Mathu says that one of the key drivers of growth at the Rwandan exchange has been the integration of regional economies under the umbrella of the East African Community (EAC). Mathu points to harmonised regulation across EAC countries in the areas of listing requirements, cross-listing, and cross-border trading.

Moremi Marwa, chief executive officer of Tanzania’s Dar es Salaam Stock Exchange, highlights “major strides” in the regional trading, settlement and depository infrastructure. His exchange has grown by 70% in terms of market capitalisation in the past two years, and is now absorbing an average of four IPOs a year compared to one in previous years, he says. PwC argues that this effective regional cooperation, alongside liberalisation of exchange regulations, could pave the way for continued growth of African ECM activity in 2015.

But as shown with Meikles’ recent experience in Zimbabwe – the firm was quickly reinstated to the exchange following threats of court action – concerns remain over whether emerging exchanges are equipped to manage the relationship with powerful firms, particularly if there is a rush to list dominant regional and international players.

There is no doubt that Rwanda sees the listing of Kenya’s Equity Bank – a regional giant serving retail customers across East Africa – as a significant coup and evidence of the successful integration of its capital markets within the wider community. LSE’s Adebayo, referring generally to exchanges tilted towards dominant firms, cautions that problems can arise.

“I think that’s a problem with any exchange, across Africa or globally. Once you have a scenario of that nature it becomes very tricky. I know examples’ where there are certain dominant players who, for example, aren’t meeting the local listing rules. It is not an environment that investors want or indeed exchanges want, but there’s very little they can do in terms of that sense of domination,” he says.

Such concerns in the Rwandan context are brushed aside by Mathu, who argues that exchanges increasingly have the capacity to successfully list large  companies.

“I don’t see that as a problem, I think for us any new product that comes, irrespective of size, is OK because even if one big company comes and tends to dominate the market, it comes with asset managers and they will be choosing where to trade the shares so I don’t see it as a problem – the more the merrier.”

The largely successful regional integration framework can also mask individual differences in each country’s approach to the market – throwing up the odd surprise for both investors and regulators. In February, stockbrokers on the Nairobi Stock Exchange threatened an almost month-long strike, later averted, over the Kenyan government’s imposition of a new capital gains tax. Mathu called the tax announcement a “surprise”, given discussions at the regional level to align fiscal and tax policies. 

Given the importance of such incentives in attracting business to an exchange – Marwa says that Tanzania’s government offers a variety of benefits for investors and corporates – more work may be needed to coordinate tax policy on a regional level.

Beyond thorny discussions over tax, the wider preference for cooperation and collaboration is going beyond the regional level and feeding into emerging relationships with the world’s established exchanges. In November, the Nigerian Stock Exchange signed an agreement with the London Stock Exchange that supports African companies seeking dual listings in London and Lagos. Such deals allow African companies access to a much larger investor pool – and the technology and expertise that will allow them to develop new services.

LSE’s Adebayo, who is involved in such partnerships across the continent, says that this technological expertise will allow companies to break away from a reliance on large listings.

“The key point is that the exchanges are concerned with developing products that create some diversification so there isn’t this over-reliance on getting large companies’ and I think that’s probably the right way to look at this, as opposed to relying singly on the listing and trading of companies, whether it’s large or small.”

It is this diversification and ability to adapt to new lines of business – paired with the vigilance of regulators and the continued interest of investors – which could drive future growth.

“I am absolutely positive that the stock exchanges or capital markets in general are going to liberate the African economies,” says Mathu.  

David Thomas