In spite of the bullish performance of the Ghana Stock Exchange, many analyst believe that the market capitalisation is too small to make any meaningful impact in attracting foreign capital. The way to go according to many analyst is to integrate with other regional markets, Boahene Asamoah explains.
THE Ghana Stock market has for the first half of this year adjudged as one the best performing stock markets in the world, with year-to-date yield far excess of 65 per cent as of last week.
But while such performance has widely been welcome as good news for investors on the Ghana bourse, many analyst believe that Ghana could not attract big time investors, because of the constraints of the small nature of the market.
According to Mr Nick Naezer, the First Counsellor and Acting Head of the Delegation, European Ghana, the Ghana bourse is shallow and illiquid and could on its own could not compete with other regional bourse in Europe for capital and investments.
“The solution is this situation is obviously regional integration”, according the Mr Naezer.
Analysts believe that there are greater benefits that comes with integration of the stock markets in Africa, the most prominent is to attract huge capital inflows especially from the major markets.
Integration of the capital markets could bring about economies of scale, increase liquidity and provide a larger pool of investment resources for national development.
African markets have shown to be more vibrant in terms of the yields over the past years, which has led to some foreign institutional investors looking at Africa with keen interest.
Over the past two years, some multi-national firms have made substantial investments in Africa, one of which is Renaissance Capital.
But the small capitalisation of the Ghana Stock market and many other African Stock markets, does not favour such big investments into Africa.
Although there are on-going talks to merge for instance the BRVM of Cote d’Iviore, the GSE and the Nigerian Stock market, the snail pace at which such talks were being done pre-supposes that the realisation of an integrated regional bourse would not be in sight sooner than expected.
However, analysts also believe that there are various dimensions of integration and it is difficult to isolate financial aspects from political, economic, commercial or monetary agendas.
“There is certainly a need to tailor the sequence of integration and the level of harmonisation, according to the progress evidenced in the other dimensions”, Mr Naezer explained.
There are currently about 20 stock markets in African and market watchers believe that the continent could learn lessons from regroups such as London, Paris, Brussels, Amsterdam and Lisbon stock markets.
Liquidity issues
The GSE, for instance has about 34 companies listed on the bourse with about 10 of these equities being actively traded in, leaving the rest with little or no movements in their share prices and or trades. The GSE has a market capitalisation of about GH¢18.004,79 million. (US$......)
The Nigeria stock market on the hand has a market cap of N Naira 9,957,879,491,625.42 (US$.............
The BRVM, which is a regional bourse for the Francophone countries in the sub-region has a market capitalisation 4,184,306,581,400 CFA (US$.......) and that the combined capitalisation of these markets has the potential to attract more foreign capital, improve liquidity and promote investments and development within the sub-region.
Some brokers have expressed their frustrations about the lack of liquidity on the Ghana market, which makes it virtually impossible to do transactions on the market.
Their frustrations step from that fact that many individual and some institutional investors were unwilling to trade their shares, hampering the smooth operations of the stock market.
Again, while the performances of many companies on the market could be described as fair, other equities performance however, could be described far from being fair.
Serious institutional investors view this lack of liquidity on the markets an unattractive for which, their investments could not be guaranteed.
However, a regional stock market could provide such liquidity for foreign investors to enter and exist the market at any time.
Constraints
The existence of various currencies with the inherent issues of convertibility is major constraints towards the realisation of a regional market.
Again, the legal regimes within the West African region and Africa as a whole have restrictive rules to foreign investments and currency exchange.
There are also difference in standards for accounting and audits within the African continent or for that matter even within the region of West Africa, the absence of a weak cross-border dispute resolution mechanisms and infrastructure and communication issues such payment systems are some of the major challenges.
Lessons from Europe
It is imperative to know that the treaty that established the European Communities did not include formal obligation to secure free movement of capital.
However, 29 years later the first document in this regard was signed when preparing the Single European Act, which constituted the first drive towards establishing an European financial area.
Under this agreement, operations concerned by the progressive liberalisation of capital movements were classified in three categories, namely, capital operations, operations in financial market securities, and operations involving financial credits.
Under the capital operations, commercial credits or direct investments were linked to the exercise of the other fundamental freedoms of the common market such as free movement of goods and services, persons and establishment.
Under the operations in financial market securities it encouraged liberalisation of financial securities such as bonds or shares requiring a single financial market at European level, while the third level operations involving financial credits, mandates a liberalisation of operations involving financial credits and operations relating to money market instruments and necessary for the establishment of a unified financial system.
The European Union proposed two main phases for achieving the liberalisation of capital movements.
These are liberalisation of capital operation, and total freedom of capital movements.
Realising the need that not all members would be able to move at the same pace the EU made provisions to support such countries to overcome such constraints.
“Moreover it was considered that it was crucial for liberalisation to be parallel by provisions designed to ensure the cohesion and identity of the financial convertibility of European currencies”, according to Mr Naezer.
It was in this light that the Single European Act signed by member countries in 1987 placed the free movement of capital on the same footing as that of goods and services and which led to the adoption in June 1988 of a directive aimed at giving the single market its financial dimension.
The EU went through some processes, which culminated in the completion of a single market by the end of 1992, seven years later in 1999 that led to the introduction of the Euro on the markets.
Market participants and experts believed that while the EU model may not replicated wholly, however, the sub-region could draw lessons from this experience.
Realities
The realities are that the total value of the Ghana Stock Exchange for instance remains small compared to the Gross Domestic Product (GDP), while access to the banking system are limited to a large number of people.
Therefore, according to analysts, capital market must play greater role in the intermediation between savings, investments and economic growth.
The robust capital market the size of a regional bourse can constitute the avenue for raising medium to long term capital especially for local entrepreneurs.
But in spite of the advantages that such a bourse presents, there are a number of constraints that face the integration of a regional bourse.
The first that comes to mind is the lack of an appropriate safeguard that minimise the risk and minimise the benefits of a stock market to investors.
“It is necessary to improve market infrastructure, mainly the clearance settlement and depository systems,” an analyst stated.
Again there is the need for clear regulatory and legal framework, using transparent codes and standards. Regulatory authorities are responsible for making markets fair, efficient and safe and investors must be protected from fraud, abuse and risk insolvency.
Market watchers believe that the underlying economic structure are not conducive enough and the vulnerability to macro-economic shocks remains high, representing a major risk to especially foreign investors.
However, many experts are also worried that deeper financial integration will increase volatility in capital markets, encourage speculation and make economies of more vulnerable to external shocks, due to the herd instincts of investors and their focus on short-term profits.
Analyst point to the financial crises in South East Asia and Latin America and the current global turmoil as clues to the potential volatility of capital markets and of the necessity to regulate their development.
“Indeed risk can be managed and therefore, risks must be compared with the potential benefits that capital markets can bring”, an analyst stated.
Market watchers point to the need to diversify financial systems with banks and non-banks so as to enhance risk sharing for investors and borrowers and to channel more domestic and international capital for investments in the national economy.
This however should be done with the appropriate safeguards investors rights.
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