Archive for the 'Strategy' Category

African bond markets statistics

Here are a few overview statistics on African local currency bond markets taken from the African Financial Markets Initiative (AFMI) annual report 2017:

Total outstanding amount of African bonds and bills rose to $413bn in 2017 (up 13% on a year earlier), and bonds made up 70%. More than 80% of the total comes from 5 countries: South Africa, Egypt, Morocco, Nigeria and Kenya (descending order of market capitalization). However, many markets are small with only 8 above $10bn in market capitalization and 19 markets below $1bn.

A total of $245bn of treasury bonds and bills were issued in 2017, up 12% compared to 2016. Of this, a total of $196bn (80%) was in instruments with term to maturity of less than 1 year. On the bond markets, $19bn of instruments with terms of 1-5 years was issued, $12bn of bonds with term 5-10 years and $18bn of bonds longer than 10 years.

Top 10 bond markets (source AFMI annual report 2017)


The AfDB/AFMISM Bloomberg African Bond Index (ABABI) includes 75% of the most liquid local currency sovereign bonds in Africa and it covers South Africa, Egypt, Nigeria, Kenya, Botswana, Namibia, Zambia and Ghana. According to AFMI “This will enable governments to improve the terms at which they borrow in domestic financial markets, thus reducing their dependence on foreign currency denominated debt.” The bond index family also includes African Domestic Bond Index (ABMDI) plus 2 sub-indices BADBC, which is a capped index giving a maximum 25% exposure per country and reducing the influence of South African bonds, and BADBX, which excludes South Africa. BADBC index returned 20.26% in USD in 2017, driven by high-yielding local-currency markets and stable exchange rates. The index offers diversification for global fixed income investors.

AFMI has organized an African Financial Markets Database which is a single portal as a web platform (www.africanbondmarkets.org) covering monetary policy, public debt management, auction results and guide to buying debt, and an African bond data portal, as a channel to disseminate domestic bond market data, standardizing data collected from different institutions. By December 2017 it covered 43 countries. The portal collects data from official websites of Ministries of Finance, central banks, debt management offices and stock exchanges and is updated quarterly. A data query section and automated data collection are being built.

In September the African Domestic Bond Fund was listed on the Stock Exchange of Mauritius as the first exchange traded fund (ETF) giving a basket exposure to several African fixed income markets. For coverage see earlier article. It will boost development of markets by providing a source of funding for local borrowers while creating a new asset class of African fixed-income securities.

AFMI has also created an African Bond Markets Development Index, which charts the state of development of the bond markets. In 2017 some markets gained strength in terms of liquidity and maturity profile based on indicators such as macroeconomic variables, market structure and market liquidity. In the top 10, Botswana, Namibia, Mauritius, Kenya and Seychelles all improved their rankings, while Nigeria and Morocco both declined, Nigeria from #2 to #6.

Top 10 in African bond market development index 2017 (source AFMI)

London Stock Exchange financing African growth

African companies listed or trading on the London Stock Exchange have a total market capitalization of over $200 billion ($271bn), and in the last 10 years have raised more than $16 bn on London’s markets. The 108 African companies is more than any other international market, according to a press release from the LSE.

There are 9 African sovereign bonds listed in London, from: Gabon, Ghana, Namibia, Nigeria and Zambia

According to Tom Attenborough, Head of International Business Development, London Stock Exchange, in an LSE press release: “The success of Vivo Energy’s IPO is a strong statement of international investor interest in building exposure to Africa. As a London-listed company, Vivo Energy, will gain access to the world’s most international market, as well as an unrivalled source of deep liquidity and new investors.

“London is a strong partner to African companies seeking to attract international investment.”

Paternoster Square with London Stock Exchange at right (credit: Wikipedia)

  • Also this month, May 2018, Angola launched a $3bn Eurobond on LSE, the country’s biggest international bond and the first international issuance since 2015.
  • In April the LSE Group, the Nairobi Securities Exchange and non-governmental organization FSD Africa signed a memorandum of understanding to explore the launch of LSEG’s business support and capital-raising programme, ELITE. In May, the first Kenyan company, Olsuswa Energy, joined the programme. So far 850 companies have joined the ELITE programme.
  • In November 2017, the LSE, Casablanca Stock Exchange and the Bourse Régionale des Valeurs Mobilières (BRVM) signed an agreement to roll out ELITE across West African markets, in a signing ceremony presided by Amadou Gon Coulibaly, Prime Minister of Côte d’Ivoire.
  • In June 2017, Nigeria raised $300m through its first Diaspora Bond on LSE, a retail bond aimed at Nigeria’s global expatriate community seeking to invest in their home country’s development. It was the first bond of its kind from sub-Saharan Africa.
  • In March 2017, LSE published its first “Companies to Inspire Africa” report, identifying hundreds of the fastest-growing and most dynamic private businesses across Africa. Vivo Energy is the first company in that report to follow up by listing on LSE.
  • In March 2016, LSEG established an Africa Advisory Group, bringing together 12 distinguished business leaders, policymakers and investors from across Africa, to discuss the challenges and opportunities presented by the development of the continent’s capital markets.
  • In November 2014, London Stock Exchange Group and The Nigerian Stock Exchange signed a capital markets agreement to support African companies seeking dual listings in London and Lagos. The agreement followed the implementation earlier in 2014 of a unique new cross-border settlement process between the UK and Nigeria.
  • In June 2014, LSEG signed a strategic agreement with Casablanca Stock Exchange to share its expertise on the full exchange business chain, from listing to trading, and from clearing to settlement and custody with a commitment to position Casablanca’s capital markets and financial infrastructure as a regional hub.
  • In April 2014, Nigerian oil and gas group Seplat was the first Nigerian company to simultaneously dual list equity shares in London and Nigeria and raised $500m in an IPO.

LSEG market infrastructure technology, supplied by Millennium IT of Sri Lanka, is deployed in more 12 African markets, including Botswana, Casablanca, Namibia and Johannesburg stock exchanges.

UK regulator accused of dropping standards to woo $2 trillion listing

Investment institutions are protesting moves by the UK capital markets regulator, the Financial Conduct Authority, to alter listing standards to accommodate a potential $2 trillion listing on the London Stock Exchange. Meanwhile rumours are growing that Saudi Aramco may be dropping its plans for a £1.5bn initial public offer on the New York, London or Tokyo Stock Exchange in addition to the Tadawul (Saudi Stock Exchange).

According to this article in the Financial Times, a trend towards “uber compliance” for listed securities means Aramco is thinking of selling shares to sovereign wealth funds, possibly led by China, as an alternative to a public listing which would have been the world’s largest float.

On 15 October, Aramco said the giant listing is still on: ““All listing venues under review for optimal decision, IPO process is on track for 2018”.

Plans for a giant £1.5bn ($2bn) initial public offering of only 5% of Aramco’s capital are a key part of Saudi Arabia’s Vision 2030, which plans to wean the economy off reliance on oil, where it made up 90% of public revenues until 2014. However, in the short term it may signal Saudi intentions to use price-fixing cartel the Organization of Petroleum Exporting Countries (OPEC) to push up oil prices and boost the valuation.

Outgoing LSE CEO Xavier Rolet accompanied British Prime Minister Theresa May for a visit to Aramco in April, while Andrew Bailey, chief executive of the FCA, agreed the regulator had met the potential listing candidate before a consultation on revising the listing standards. Many observers think there is political pressure on FCA and LSE to win the listing from New York and prove that London is still competitive as Brexit uncertainty and economic damage impacts UK.

Consultation on the FCA’s new listing rules closed on Friday 13 October. It would be the world’s largest float.

According to writer Nils Pratley in The Guardian: “Furious fund managers sense a bad case of a regulator planning to lower standards to suit ministers’ short-term desire to persuade Aramco to float in London rather than New York.

“The investors’ objection is straightforward: why on earth would we want to create a ‘premium’ listing category for state-owned companies while not enforcing normal investor protections?

“Under the FCA’s proposal, the likes of Aramco would be allowed to ignore some basic principles. They would not have to get approval from outside shareholders for transactions with the state. They would not have to give independent shareholders a vote on who should serve as independent directors.

“There clearly could be a place for such companies in London, but you would hardly award ‘premium’ status, a label that is meant to indicate the highest governance protections. The regulatory regime would look like a pushover, which may succeed in drumming up some short-term business but could seriously damage London’s status as a good place to invest.”

On 18 October, the world’s biggest wealth fund warned the FCA that the listing changes would be a “step back”, according to an article in City AM. Norges Bank Investmnet Management, part of the Norwegian Central bank which manages assets on behalf of Norway’s $1trn fund, which has $44bn invested in LSE companies, wrote on 13 October to FCA:

“Ultimately, investors expect today’s high standards of shareholder protection to apply to the premium listing category, whether controlled by a sovereign state or private investors. We fear that relaxing these rules would reduce the voice of minority investors and undermine the independence of the board.”

NBIM said the changes would be a “step back” in terms of investor protection, especially for minority shareholders, and would threaten the London Stock Exchange’s standing as a best in class corporate governance framework: “We believe the FCA should consider a more balanced approach that takes into consideration the interests of all stakeholders in the listing environment.” Other protests about relaxing the listing rules have come from a wide range of institutions, including the Institute of Directors and investor group the International Corporate Governance Network which said the plans were “fundamentally flawed” and increased risk. The Investment Association boss Chris Cummings said the change: “could impact on London’s reputation and future as one of the world’s leading financial centres”.

FCA’s Bailey had told Parliament that people would not need to invest in the new listing if they did not like the governance. According to this article , he wrote: “We do not think protections for investors will be weakened. Plainly, absent the new category, sovereign-controlled companies would be unable to choose a premium listing; they would therefore not be bound by any of the premium listing requirements that might otherwise offer additional protection for investors.”

Bailey said some criticism of the proposal left the “incorrect impression that the premium listing is monolithic in form, and therefore, that any issuer included in that category must also be included in the main FTSE UK index”. Financial services advocacy group The CityUK supported the FCA’s “open-minded approach to regulatory change”.

Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management, said it will be “bad news” for London if the proposals are put in place: “It looks like the FCA is consulting on amending the existing listing rules to accommodate the peculiarities of one company, which is not a very effective strategy for regulating the market as a whole. If the proposals in this consultation document are implemented, it will be bad news for London and will reverse the progress we have made in recent years to uphold strong governance and protect minority shareholders.”

According to the Financial Times: “A market regulator that makes transparent and fair rules, respecting both property rights and investor choice, will attract business in the long run. If, on the other hand, attracting business becomes a short-term goal, and rules are tailored to land big deals, regulation becomes marketing, and the long-term outlook becomes much less attractive.”

Saudi Aramco says its 2018 listing is on track (photo Reuters/Ali Jarekji)

Do African commodities exchanges achieve the desired results?

The Ethiopian Commodity Exchange (ECX) was set up with backing from the Ethiopian Government. In a very readable 2012 paper by the founder and first CEO Eleni Gabre-Madhin outlining the origins, aims and implementation of ECX, she mentions the Government backing in replacing laws so that trade in commodities including coffee (which makes up 35% of Ethiopia’s exports from 2000-2014), has to go through the exchange, and the determined resistance from those who had previously dominated the export trade.

Ethiopian Commodity Exchange (photo from http://africabusinesscommunities.com)

She mentions funding: “Five initial donors — the US Agency for International Development, the Canadian International Development Agency, the World Bank, the International Fund for Agricultural Development, and the United Nations Development Programme — committed US$9.2 million in just two weeks. This figure grew over the years as commitments increased. The World Food Programme and the European Union joined the list, and donor funding eventually reached US$29 million.” Bill & Melinda Gates Foundation is mentioned in later articles as a donor.

Since the early days of ECX, payment has been guaranteed the day after purchase and there is a proud record of zero defaults (as on nearly all regulated exchanges worldwide). This is a big change on earlier problems faced by farmers and others with many buyers reneging on contracts. In addition Eleni’s aimed that the exchange should transform agricultural marketing countrywide, and she oversaw the construction of a host of modern regional warehouses and transport.

On the negative side, a news report in January 2017 in local The Reporter newspaper mentions ECX users reporting problems including increasing contraband and quality compromises by bribing the “cuppers” who grade the commodities.

A study by the International Food Policy Research Institute (IFPRI) in May 2017 suggests that with regard to coffee, the ECX had not brought enough transformation: “Before the establishment of the ECX, Ethiopia had a fairly well-functioning coffee auction floor in Addis Ababa… Second, the strict regulations that the ECX has introduced into the country’s coffee market have resulted in higher transaction costs. These costs could potentially cancel out the benefits of some of the ECX’s innovations, such as electronic payment systems. Finally, the Ethiopian coffee sector continues to face some inherent challenges that are not affected by the ECX—namely, weak infrastructure and low productivity”.

In February 2017 The Economist published an article about African commodity exchanges dubbing them “high tech, low impact”. It noted that ECX had not moved beyond spot trading since 2008 and futures contracts to help farmers manage price fluctuations are far behind the 5-year target.

The Economist verdict: “The Government made it viable by mandating that almost all trade in coffee and some other commodities go through the exchange. This might not be possible elsewhere. A monopoly imposed by fiat makes it more like a state marketing board than an exchange, says Thomas Jayne, an economist at Michigan State University.

“Another model might be the Agricultural Commodity Exchange for Africa in Malawi, which was set up privately in 2006 at the request of an association of smallholder farmers. But its volumes remain low. And its concentration on staple foods such as maize and soya leaves it vulnerable to the sort of government interventions that can sink exchanges. Trading in staples tends to be politically sensitive in times of food scarcity.

“Setting up national exchanges may be the wrong approach. The Johannesburg Stock Exchange plans to introduce a regional contract for Zambian white maize later this year. For lucrative export crops like coffee, well-established offshore exchanges may make more sense than starting from scratch at home. Better a functioning exchange somewhere else than a disappointing one on the doorstep.”

South Africa’s securities exchange war goes to court

Court is the next battleground in a contest to transform the securities exchange landscape in South Africa. Newly licensed exchange 4AX, which is not yet operational, has launched a High Court application to set aside both the decisions of the FSB regulator and its Appeals Board to give a licence to new exchange ZAR X, according to Moneyweb .

Last September the Registrar of South Africa’s Financial Services Board (FSB) awarded licences to ZARX (Pty) Ltd (ZAR X) and 4 Africa Exchange (Pty) Ltd (4AX) (see our story here). The JSE and 4AX appealed against ZAR X’s licence, but in February 2017 the FSB Appeals Board dismissed the appeal, saying that ZARX and the FSB had complied fully with the Financial Markets Act 2012 (FMA), and awarding full costs to both ZARX and the FSB (see another Moneyweb article). ZAR X settled its first trade in February 2017, delayed from an initial September launch date. Its first listing was agribusiness Senwes. 4AX is not yet trading.

In February Donna Nemer, JSE Director of Capital Markets, said the JSE will fully respect and abide by the decision: “We are still very committed to the market and the participants in this market, and will cooperate fully in the debate on how we should be evolving going forward,” she said. “We will continue the work we are doing with the regulator and all the market participants, including the new exchanges, to maintain the high quality capital markets for which South Africa is really well known.” The JSE is not joining the new court case which 4AX has launched in the South Gauteng High Court to set aside both the decisions of the FSB Registrar and the FSB Appeals Board.

Also in waiting is exchange A2X, which has a licence application with the FSB. For more background on 4AX see our story.

Why another exchange?
The new bourse ZAR X has 3 listed securities and 9 authorized market participants or brokers, according to its website. It says a number of listings are in the pipeline.
According to Geoff Cook, cofounder and director of ZAR X, writing in Business Day newspaper this month: “Nowhere is radical change more desperately needed in SA than in the capital markets. The model that has dominated for more than 60 years is stagnant, with no broadening of the capital markets. It is also hopelessly skewed against the private investor.”
Volumes had grown of trading over the counter (OTC) in shares in black economic empowerment schemes for big companies such as MTN, Vodacom, Multichoice, Sasol and Imperial. Other OTC schemes were being operated as restricted shareholder platforms such as large agricultural cooperatives Senwes, TWK and KWV, while a few other companies sought liquidity at low cost for a limited spread of shareholders.

Geoff Cook, ZAR X Head Markets and Regulations (credit ZAR X)


ZAR X co-founder and CEO Etienne Nel created a platform called Equity Express for the OTC market. In July 2014 the FSB issued Board Notice #68 which effectively compels the OTC equity trading market to alter methodology and operate through a licensed exchange in terms of the FMA.
ZAR X works with a pre-funded model, so that cash is prepaid (deposited into the system before a trade) and a seller’s shareholding is pre-cleared before concluding a transaction. This means a huge reduction in settlement risk. Securities are held in a segregated depository account at a central securities depository (CSD), as required by the FMA, with a CSD participant facilitating clearing. The trade settles on t+0 or real time.
According to Cook: “Only severe disruption will return the financial markets to any sense of reality and social relevance. That disruption has arrived. Brokers can now execute a R1,000 order profitably through a world-leading T+0 prefunded execution model that does not require settlement risk capital, in which trading and administration applications are provided at minimal cost and where live data is free to all. Safe custody fees are zero and fees are only paid on conclusion of a transaction.
“The equity market is too concentrated and the debt market remains inaccessible and opaque. Despite there being nearly 1,300 collective investment schemes as well as many broker-managed discretionary portfolios, allocations are nearly all aligned to a limited number of old economy securities. Passive investment products such as index trackers simply compound the concentration.”
Cook says that regulation and the funding imbalance towards collective investment schemes means innovative small and medium and medium-sized companies will struggle to raise capital from asset managers. They need direct access to retail investors or bespoke asset managers who can invest smaller amounts. Asset managers are restricted by the size of their portfolios to investing in securities with large market capitalization.
He says the new exchange will mean that listings of companies with market capitalization of around R200m will become more common.
Cook claims that on average less than 0.5% of daily market volume on the JSE is retail-driven with less than 300,000 active retail clients, across all brokers, loaded within the JSE’s broker deal accounting (BDA) system. He says 30% of trading volume comes from brokers who collocated or moved their trading systems physically closer to the JSE trading engine in order to profit by millisecond time advantages. According to its website: “No high frequency trading, derivatives or short selling will be allowed. ZAR X has deliberately structured fees in such a manner that we wish to encourage investing rather than trading and, in so doing, promote savings.”
“Nearly all equity listings om the JSE are now done by way of private placement, which requires a minimum investment of R100,000 per subscriber. Offers to the public are rare as brokers in the conventional system cannot facilitate smaller retail client transactions profitably. With high costs and insufficient order flow brokers focus on providing discretionary managed portfolios, which attract higher fees but have higher financial entry requirements.
“The ‘uninvested’ retail investor is therefore totally excluded from directly participating in the capital market. Their only access is indirectly via a collective investment scheme that, if they did, would further perpetuate the shrinking of our capital market.
“The concentration of order flows to fewer institutional brokers is detrimental to efficient and transparent market pricing. With thin net margins, institutional brokers use their balance sheets to secure revenue flow by engaging in principal trading, high-frequency trading (HFT), and facilitation trading, including dark pools.”

Stokvels – South Africa’s $3.8bn savings pool
Cook claims there is huge potential for retail investors to buy securities: “Stokvels, whose members are active savers and investors, have more than 2m members. The Zion Christian Church has about 4-million contributing members. The potential size of the ’uninvested’ retail market is unknown, but I would suggest it is in excess of R700bn. The market system has ignored it.”
ZAR X also hopes to work with other exchanges “particularly in Africa”.
Stokvels are a big part of life in South Africa, with estimated 810,000 stokvels and 11.5m members, with a stokvel economy worth R49bn ($3.8bn), according to the National Stokvel Association of South Africa. There is even a comedy show called Stokvel on DSTV’s Zambezi Magic.

Stokvel comedy, Zambezi Magic DSTV.

World Exchange Congress 2017: First step – get domestic capital markets right

Here are some key points from the panel on “Alternative exchanges and connecting the African markets: What do you need to know?” at the World Exchange Congress 2017 in Budapest. All are CEOs: Moderator: Hirander Misra, Chairman and CEO, GMEX Group; Thapelo Tsheole, Botswana Stock Exchange; Moremi Marwa, Dar Es Salaam Stock Exchange; Sunil Benimadhu, Stock Exchange of Mauritius.

Q1: How to develop frontier African stock markets? Benimadhu: “We look at what our niche products are, that we do better than others. We list those products on the exchange. Then we think: ‘How we reach out to the world and tell our story?’ We need to make sure trading on our exchange is easy, efficient and meets international standards. Then we can look beyond our borders and ask what does the region need?”

Q2: Should you offer risk mitigation for currencies? Tanzania, Botswana and Mauritius are all open for investors to take their capital out, Mauritius was one of the first African markets to drop exchange control; it was brave as it’s a small economy, but it found the capital flowing in soon became more than the capital flowing out.
Protecting against changes in value of African currencies such as KES and NGN will be very important for attracting foreign investors, for inter-African trade and for trading in derivatives linked to international currencies. Benimadhu – Mauritius (and other markets) are looking at exchange-traded linked products to mitigate currency risk “there is a strong need to come up with a very sophisticated derivatives platform for mitigating currency risk”.

Q3: Inter-African stock-market links? Marwa: “We are harmonizing our trading rules among the 4 markets in the region – Kenya, Tanzania, Uganda and Rwanda – with the help of the World Bank. We are building an infrastructure based in Tanzania combining our automated trading systems (ATS) and central securities depositories (CSDs). In the Southern African Development Community (SADC) we are also making some progress in harmonizing and integrating our markets.
“Investors would rather see us as one big market, instead of small markets. For any issuer, reaching out the whole region will attract wider interest. In Tanzania we are well placed for this and we encourage harmonization and integration.”
Benimadhu “I have seen examples of larger markets and we should learn from that and use their experience. Take the case of Australia and Singapore, they allowed brokers from Singapore to trade in Australia and vice versa to increase order flow. After 10 years they scrapped it, it did not generate expected volumes. Many of the others have also fallen short of expectations. One which is working is Hong Kong-Shanghai but that is for specific reasons, including access to the Chinese market.
“I am a contrarian. I believe linkages make sense, but before doing that it makes sense to grow the domestic market. Open up, attract foreign flows. Don’t spend a lot of time and energy on linkages, but focus first on growing the domestic market. We should follow regional links, but they should not sidetrack us from where we should concentrate, on our own markets”.

London Stock Exchange £24.5bn merger with Deutsche Börse in doubt

Doubt has been cast on the EUR29bn (£24.5bn) merger between London Stock Exchange Group plc and Deutsche Börse AG this week, after the European Commission demanded LSE must sell off its 60% stake in fixed-income trading platform MTS S.p.A. This is a part of LSE’s Italian business and an important clearing house for European government bonds, including Italian government debt.
The LSE says the EC is “unlikely to provide clearance” after it surprised the City and refused to comply with the demand. It said on Sunday that the request was “disproportionate”.
The deal had been announced a year ago as a “merger of equals” to create a mega-exchange capable of taking on the US exchanges. The European Commission could announce its verdict on 4 April.
LSE and Deutsche Börse had previously agreed to sell the French part of LSE’s clearing business, LCH, to satisfy competition concerns. Rival Euronext was the interested bidder. That may not go ahead.
LSE said that selling its stake in MTS would require approval from several European national regulators and hurt its wider Italian business, where MTS is classified as a “systemically important regulated business”. The LSE also owns Borsa Italiana, based in Milan.
In its statement, LSE said: “Taking all relevant factors into account, and acting in the best interests of shareholders, the LSE Board today concluded that it could not commit to the divestment of MTS.”
US exchanges, including Intercontinental Exchange, headquartered in Atlanta, may now start bidding for the LSE Group.
The 2 leading European exchanges had previously tried to merge in 2000 and 2005. In the current deal, Deutsche Börse, which operates Frankfurt Stock Exchange, will have a 54% stake in the enlarged business but the headquarters was forecast to stay in London. There were concerns post UK’s “Brexit” vote to leave the European Union that considerable volumes of clearing, especially securities denominated in euros, would move to Europe.
LSE and Deutsche Börse say the deal is still on, pending the European Commission verdict. Fees so far to City bankers, lawyers and public relations advisers have so far topped £300m, according to calculations on an announcement.
Deutsche Börse also operates the Luxembourg-based clearing house Clearstream and derivatives platform Eurex. It commented: “The parties will await the further assessment by the European commission and currently expect a decision by the European commission on the merger of Deutsche Börse and LSE by the end of March 2017.”

Paternoster Square with London Stock Exchange at right (credit: Wikipedia)

Small African stock exchanges are likely to stay small

The Economist magazine says most African stock exchanges are small and likely to stay that way. It says few smaller, family-owned businesses, are keen to list on African stock exchanges and that liquidity or secondary trading is an “even bigger challenge” with few African exchanges achieving turnover (share value traded) of even 10% of market capitalization (the value of shares listed).

The magazine cites a recent paper by economists from Erasmus University, Rotterdam, and City University, London. They investigate 59 nascent stock exchanges around the world. They find that exchanges which start small, with few listings and low turnover, tend to remain so. The best chance for success comes from strong banks and growing savings, meaning that many African exchanges might need to wait until their economies grow.

Source: The Economist with figures from World Federation of Exchanges

Several African exchanges are big enough to move forward, including Johannesburg Stock Exchange with nearly $1 trn in market capitalization, Nigeria Stock Exchange and Kenya’s Nairobi Securities Exchange. The article also points to the successful regionalization project that is the Bourse Régionale des Valeurs Mobilières (BRVM), headquartered in Côte d’Ivoire and bringing together 8 national markets to create more investors and more listed stocks.

The article was written after the author attended last month’s 2016 African Securities Exchanges Association conference in Rwanda and watching the brokers in scarlet jackets at the trading board of the Rwanda Stock Exchange in Kigali. It says most African exchanges were created in the 1990s to help with the sale or privatization of state-owned enterprises. Many of these have been turned from loss making drains into high profit giants, driving economies, creating jobs and making investors including local institutions richer.

On the Uganda Securities Exchange, 7 out of 8 domestic listings are from privatizations, and many other exchanges tell the same story. Botswana’s national telco was the BSE’s biggest IPO when it came to market successfully this year. Others are forcing companies to list, for instance telecom companies and mining companies are key targets and listing can be forced through respective licensing of other regulations. Tanzania has reportedly ordered 8 telcos, including 3 offshoots of international companies, to float 28% of shares and MTN is likely to list on the Nigerian bourse in a deal with the telecoms regulator.

Meanwhile private equity continues to flourish in Africa. There could be a positive spin-off in terms of private equity funds using stock exchanges as exits to sell on to new funds and through IPOs. The article does not touch on one of the most interesting trends, the rise of African institutional investors and the effect they could have on capital markets development.

For the original Economist article, read here.

BRVM bourse aims for specialist mining shares platform

The integrated regional stock exchange for West Africa is working with the miners’ favourite global exchange for raising capital in order to build a platform for listing mining shares. Bourse Regionale des Valeurs Mobilieres (BRVM), based in Abidjan, Côte d’Ivoire, aims to have a dedicated section for mining ready for business by 2018.

BRVM General Manager Edoh Kossi Amenounve told Bloomberg in an interview that the new mining exchange will be open for companies exploring or operating mines in the region. He explained that the BRVM is talking with Canada’s Toronto Stock Exchange (TMX Group) to set up a “technical partnership” between the two bourses and will “take inspiration” from the Canadian mining-exchange model. Discussions may be completed by the end of 2016.

He told Bloomberg: “Mining companies operating in the region only raise funds in foreign currencies.. Some of them have approached us to see how they could raise the resources they need in local currency. Some have even asked us for a dual listing with the Toronto stock exchange, but the regulating framework isn’t compatible at the moment.”

The BRVM links eight West African countries in an innovative exchange, including gold exporters Mali, Burkina Faso and Côte d’Ivoire (Ivory Coast), and the world’s fourth-largest uranium producer, Niger. Many want to boost their mining industries: Burkina Faso is developing new gold and manganese mines, while Côte d’Ivoire is diversifying from agriculture, including cocoa, and aims to develop its untapped mining deposits, including gold and iron ore, according to Bloomberg. The BRVM attracts investors partly because the countries are part of the West African Economic and Monetary Union (WAEMU) and so use the CFA Franc, which is pegged to the euro.

Amenounve said: “Most of the countries of the region have significant mining deposits… The development of the mining sector has been extremely important in the last few years. We want to support this development..  We need local, African shareholders to invest in the mining sector.”

The bourse currently dominated by banks and telecommunications shares. It is amending its listing regulations to accommodated the new mining platform. Currently listing regulations require two years of certified accounts. The BRVM exchange aims to list mining issuers, including new companies who are raising money for exploration.

Karma heap-leach project in Burkina Faso (photo:True Gold Mining)

Karma heap-leach project in Burkina Faso (photo:True Gold Mining)

Korea Exchange success story with SMEs

This article summarizes a talk by Honghee Shin, Executive Director of Korea Exchange, at the World Exchanges Congress in March 2016, which highlighted the KRX experience and lessons to be learned.
Building an exchange environment for small and medium-size enterprises and hi-tech companies to raise capital on a securities exchange requires strategic coordination and support by many different government agencies. The Korean Exchange (KRX) has grown to be the world’s third biggest stock exchange for listing and trading SMEs by creating a virtuous cycle in each stage of growth generates cash-flows which in turn fuel other stages.

The original Korea Stock Exchange was set up in 1956 and KRX evolved in 2005 to offer comprehensive front-to-end services. It has KSD (depository) as a 70% owned-subsidiary and also owns 76% of >koscom, a technology subsidiary. It offers a full range of products, trading and market data, as well as the central counterparty (CCP) and it is a self-regulatory organization performing its own market surveillance.

In 2015, KRX had 1,961 listed companies, 8th highest in the world, and traded $1,929 billion of securities, achieving the 10th highest level globally, according to World Federation of Exchanges. The main board is called KOSPI market and it has a futures and options market that was rated 12th in the world.

koreaSMEs160719_diagramvirtuouscycle

It has two boards for SMEs:
• KOSDAQ was launched in 1996, and provides funds for well-established SMEs and “technology-savvy” area including information technology (IT), bio technology (BT) and cultural technology (CT).
• KONEX was launched in 2013 exclusively for SMEs and start-up companies to support their early-stage financing and development through the capital market.

The ratio of market capitalization compared to GDP is higher at KOSDAQ in Korea than any other major SME markets in Asia. In global terms it ranks third among world SME markets for market capitalization and daily trading volume and 4th with 1,061 listed companies. Technology has been the main driver of the market – IT, BT and CT companies made up 68% of the market in 2015, up from 63% in 2005. In particular, biotech has grown its share 4 times and forms 17% of the total market.

KONEX had 24 companies in the third quarter of 2013, but increased that 5 times to 128 listed companies by the end of 2015. Market capitalization is up 8x, and daily average trading value is up 4x over the period. It offers a fast-track “ladder system” which 14 companies have scaled to transfer from KONEX to KOSDAQ.

Much of the success of the exchange can be attributed to the coordinated efforts of Government, the exchange and other stakeholders.

koreaSMEs160719_diagramstakeholders

Key supports from Government include:
1. Tax incentives
– Corporate tax exemption for investing in newly-listed shares(within 2 years)
2. De-regulation for M&A
– Between KONEX and unlisted stocks
– Relieving corporate governance structure
– Waiver of obligation on appointment of external director and full-time auditor
3. Eased accounting standard application
– Exemption of K-IFRS accounting standard.

Concessions offered by KRX are:
1. Relaxation of Listing Requirements
– Lightened listing requirements for corporations with 20% of total investment from angel investors and venture capital
2. Modified disclosure obligation
– Reduction of timely-disclosure
– Exemption of quarter and semi-annual reports
– Mitigation of obligation to submit registration of securities
3. Minimum deposit requirement for investors adjusted from $300,000 to $100,000.

The exchange brings together companies from diversified industries, with a convergence of the high-tech companies that are the driving force of the economy. There is a solid investor base, including active retail investors with ample liquidity, and the exchange offers them a new way to find investment opportunities. The KRX itself offers relaxed listing requirements and less disclosure and maintenance costs. Government offers supportive policies towards gradual de-regulation as well as tax incentives and benefits.

The 2 Korean boards, KOSDAQ and KONEX play a critical role in a virtuous circle of growth and investment. Typically venture capital (VC), angel investors and government (through policies as well as funds) invests into start-up companies. These grow to list on KONEX, where professional investors tend to invest in what re now start-up SME companies, and VC investors can take some funds out to re-invest into fresh start-ups. As the company grows further, it can more to KOSDAQ where often non-professional investors may be interested in what have evolved into established SMEs, and the VCs can take more funds to reinvest into the earlier growth stages. The virtuous circle means that each stage adds momentum to the other stages, fuelling further growth – for the diagram see above.