Macroeconomic Stability in African stock market

Macroeconomic Stability

Macroeconomic stability may be an important factor for the development of the African stock market. We expect that the higher the macroeconomic stability the more incentive firms and investors have to participate in the stock market.

Stock Market Liquidity

Liquidity is the ease and speed at which economic agents can buy and sell securities. The more liquid markets could ease investment in long term, potentially more profitable projects, thereby improving the allocation of capital and enhancing prospects for long term growth. The more liquid the stock market, the larger the amount of savings that are channelled through the stock market. Therefore, more liquid stock markets are desirable and required for the African Stock market to become more competent.

Banking Sector Development

The development of the banking sector is important for stock market performance and development in Africa. Support services from the banking system contribute significantly to the development of the stock market. Consequently, liquid inter-bank markets, largely supported by an efficient banking system, are important for the development of the stock market.

Institutional Quality

Institutional Quality is an important factor to be taken into account when analyzing the African stock market. Efficient and accountable institutions tend broaden appeal and confidence in equity investment. Equity investment thus becomes gradually more attractive as political risk is resolved over time. Therefore, the development of good quality institutions can affect the attractiveness of equity investment and lead to stock market development. Good quality institutions such as law and order, democratic accountability, bureaucratic quality are important determinants of stock market development in Africa because they reduce political risk and enhance the viability of external finance.

Automation

Automation is expected to help reduce the costs and inefficiencies in African stock

markets and increase trading activity and liquidity. Automation helps to speed up operations and activities of exchanges and reduces cost associated with manual systems. Automation is an expensive venture and has huge budgetary implications for African governments. This might explain why most African stock markets have found it difficult to fully automate their systems. However, with the proliferation of electronic communication networks (ECNs) and alternative trading systems (ATS), the cost of automation is gradually reducing.

Demutualization

Demutualization can be defined as a change in the legal status, structure and governance of an exchange from a non-profit, protected interest one to a profit oriented. The process of demutualization involves a change in ownership structure and a change in legal and organization form. Factors such as competition among exchanges, need for increased capital, need for good corporate governance in exchanges and the urge to open up ownership of exchanges to public investors help demutualization gain popularity.

Demutualization is expected to solve mutual structure problems by opening up trading rights, admitting new trading partners, and broadening ownership such that the public can invest in exchanges. It also increases access to services of the exchange and removes excessive investment costs for fund holders.

However, the policy of demutualization should not be of immediate concern to most African exchanges. The reason is that most African exchanges have barely existed for three decades, and are grappling with teething issues of poor infrastructure and illiquidity. Demutualization would, therefore, be more relevant in the medium to long term when the teething issues have been properly managed.

Regional Integration

Another proposed solution to problems faced by African stock markets is to integrate stock exchanges. Merging stock exchanges (the extreme form of integration) results in volumes multiplying with potentially the same overhead costs. Merging African stock markets into a single regional exchange immediately is no doubt an ambitious and daunting task, given the associated institutional and financial cost complexities. Proponents of this proposition argue that a well integrated regional stock exchange in Africa will be a powerful source and driver of capital flows to Africa. Such an exchange will also, if well structured, solve the current problems of illiquidity, small size, and fragmentation.

Promote Institutional Investors

The involvement of institutional investors in African exchanges must be pursued vigorously. Institutional investors often are at the forefront in promoting efficient market practices and financial innovation. They typically favor greater transparency and market integrity in both primary and secondary markets, seek lower transaction cost, and encourage efficient trading and settlement facilities. Indeed African exchanges stand to gain from increasing the involvement of institutional investors on stock exchanges.

Strengthen Regulation and Supervision

Regulation and supervision of the financial system play a great role in determining both its stability and the extent of services provided. Regulation and supervision are typically aimed at the protection of investors from the potentially opportunistic behavior of insiders.

Money, foreign exchange, and capital markets

• Enhance surveillance of the OTC forex exchange derivative markets by systematic processing and analysis of information on offshore activity.

• Facilitate further development of the stock and bond markets, including by continued measured liberalization of exchange controls calibrated to take account of the macroeconomic situation.

Pan African Stock Exchange

The AU mooted a Pan-African Stock Exchange as a way of creating a vehicle through which African multinationals can borrow big money from the public.

A pan-African stock exchange would allow a company an effective listing in all the continent's participating countries. Under the JSE model, the exchange would enable investors to trade in shares in companies from Ghana, Namibia, Zimbabwe and Zambia, expanding coverage to most of Africa.

The JSE plan must, however, avoid swamping the new exchange with South African companies, already accounting for about 80% of the value of all African shares.

It must also find ways of dealing with the exchange controls operating in many African countries making settlement difficult.

The Africa board, which was set up under the Johannesburg Stock Exchange (JSE), was created to draw foreign money into the Pan-African market while giving groups listed on other African Exchanges the opportunity to list on the JSE in addition to their current bourse.

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