‘BUILDING RESILIENT CAPITAL MARKETS’

The theme for this conference, Building Resilient African Capital Markets is one that is more relevant at this point in time considering the events unfolding globally.

First let me begin by speaking about how African securities exchanges can work towards their shared vision of creating effective and efficient capital market platforms that address the needs of all involved in the various processes they undertake.

•       It is now well understood that economic development requires healthy growth of a nation’s financial sector.

•       Initially, nations tended to channel their savings and investment primarily, if not almost exclusively, through banks. But over time, savers in search of higher returns and firms seeking capital provide the foundation for the development of capital markets.

•       Here, too, a sequence is evident: first, the issuance and trading of bills and bonds of national governments, followed by the issuance and trading of bonds and equities of publicly held corporations.

•       Capital markets cannot function effectively, however, unless a number of elements are in place. Exchanges and clearing and settlement systems must exist to enable trading, and money market arrangements are needed to facilitate settlements.

•       A legal system must exist to enforce contracts. Information about the financial soundness and future prospects of companies must be made available on a timely basis to give investors’ confidence to purchase corporate instruments (both debt and equity).

•       Corporations must be governed in a fashion that also gives investors’ confidence that their funds will not be wasted or stolen.

•       One of the key structural changes in a growing number of emerging markets has been the rapid development of local securities markets since the mid-1990s. This change has reflected both policy efforts by the authorities in major emerging markets and trends in global financial markets.

•       The efforts to develop local securities markets have been motivated by a number of considerations, especially the desire to provide an alternative source of funding in order to self-insure against reversals in capital flows. One motivation has been a desire to stimulate domestic saving by offering savers new financial instruments that broaden the set of investment opportunities and allow for better portfolio diversification.

•       In many emerging markets, for example, domestic residents traditionally have had access to only two types of domestic instruments—bank deposits and domestic equities—and have had little access to international markets. Another consideration has been to improve the intermediation of domestic savings and attract foreign investors.

•       Ladies and gentlemen at the current moment substantial challenges are clouding the global economic outlook in both the near and long term. For emerging market and developing economies lackluster investment is particularly concerning.

•       Investment growth in these economies is expected to remain weak and below historical averages, held back by sluggish global growth; limited fiscal space; and structural constraints that misallocate or discourage investment such as poor business environments, labor and product market controls, and weak governance.

•       Subdued investment weakens the foundations for the sustained growth that is needed to alleviate extreme poverty and advance shared prosperity.

•       In an era of low interest rates, government borrowing might appear to be an attractive option to finance growth-enhancing investment projects. Debt is often an important tool for development and poverty reduction, and sustainable borrowing can help countries finance investments in infrastructure, health, education, and other essential areas.

•       To be additive to growth, however, debt has to be transparent and well managed. Otherwise, it becomes more of a burden than a benefit by increasing vulnerability to crises, eroding the effectiveness of macroeconomic policy, and weighing on investment and growth.

•       In light of these happenings we believe that opportunities abound across many emerging markets sectors.  To foster growth, we need to connect investors to products that build human and physical capital which can be achieved through improving capital market activity.

•       Given the growing importance of local capital markets as a source of funding for both the corporate and public sectors, the question becomes what policies can be most effective in stimulating African capital market development? 

•       There is broad agreement that improvements in market infrastructure and transparency, better corporate governance, and the development of benchmarks and domestic institutional investors all contribute to the development of local securities markets.

•       The net benefits are less clear-cut regarding other aspects of the development of local securities markets (the so-called gray areas). These include the use of indexed bonds, credit risk pricing, government policies toward the development of local stock markets, the role of foreign investors, the development of local derivatives markets, and the sequencing of local securities markets reforms.

•       Nonetheless, despite the ambiguities concerning policies in these areas, some conclusions seem warranted. For instance, the existence of indexed instruments and derivatives can lengthen and deepen fixed- income markets, but they may require careful monitoring to prevent undesirable mismatches and excessively leveraged positions.

•       Moreover, stock market reforms that improve the conditions under which corporations’ issue and trade shares should be welcomed, but they should not protect local exchanges or the domestic brokerage industry from domestic or foreign competition. Similarly, foreign investors can contribute to the deepening of local markets, even if they may add to volatility during episodes of crisis.

•       Many emerging markets including those in Africa have realized the importance of developing a local institutional investor base to support local securities markets. The growth of such an investor base has usually been slow, however, and tight regulations on asset allocations have constrained the potentially beneficial role that they could play in local securities markets. This is something African market and pension regulators need to change if we are to reach the desired goal of liquid markets

•       With regards to corporate governance, a number of countries have adopted measures to improve transparency and corporate governance, which they see as critical for local capital market development.

•       Studies have shown that countries with less protection for minority shareholders have less developed equity markets, and that firms in these countries use less outside finance and have higher debt-equity ratios, making them more vulnerable to shocks.

•       In response to this evidence, as well as to high-profile shareholder conflicts, it is great to see some African countries have recently changed the laws governing capital markets while others have approved codes of best practice designed to improve disclosure, protect minority shareholders’ rights, and maximize shareholder value.

•       On the last note, while well-functioning stock exchanges can yield efficiency gains by providing key sources of funding for the corporate sector and of liquidity for investors, there has been considerable debate about the extent of public sector involvement in helping to develop stock exchanges.

•       There is general agreement that the development of equity markets will be facilitated by a sound macroeconomic environment, open access to foreign investors, political stability, and enforceable property rights.

•       Properly designed and executed privatization programs can also stimulate the development of equity markets, and improvements in corporate governance and the protection of minority shareholders’ interests are generally moves in the right direction

•       Ladies and gentlemen before I conclude let me briefly talk about the World Bank Group’s efforts in contributing to the development of African capital markets.

•       Through our private investment arm the International Finance Corporation (IFC), the World Bank in has issued global benchmarks each year since 2000.

•       The IFC complements its public issuances by accessing a variety of different markets such as green bonds, private placements and discount notes.

•       The IFC was notably the first non-domestic issuer in China, India, Dominican Republic, Nigeria, Peru, Zambia, Rwanda, Botswana, Namibia and others.

•       In Botswana, the IFC issued its first bond listed on the Botswana Stock Exchange, dubbed the IFC Kgalagadi Bond in December 2017.

•       This was the first ever international AAA-rated Botswana Pula bond issuance.

•       This issuance added to the availability of long-term local-currency finance for local businesses while strengthening the country’s domestic capital markets

•       The proceeds of the IFC bond issue were used to provide a BWP loan to Botswana Building Society, to help: (i) increase access to financial services by the lower end of the market; (ii) deepen financial inclusion through a focus on underserved clients; and (iii) foster healthy competition in the project country’s financial sector.

•       This is model that we will continue to repeat and replicate across the African continent as we assist in socio-economic development.

•    I look forward to engaging with all of you and sharing ideas towards building resilient African markets.

*KEYNOTE SPEECH on “BUILDING RESILIENT CAPITAL MARKETS” by MR XAVIER FURTADO. WORLD BANK GROUP COUNTRY REPRESENATITIVE AND SPECIAL ENVOY TO SADC. Day 1 of Conference – 25^th November 2019.