Private capitals flows—foreign direct investment, remittances and portfolio investment and are an important for stock market development. Even though capital flows to Africa have been increasing recently, they are still at very low levels. In particular, portfolio investment accounts for a minor share of capital flows to Africa with a meager share of 0.15 percent of the total capital flows to Africa in 2003 (excluding South Africa). On the other hand, portfolio flows dominate the total capital flows to South Africa increasing liquidity on the JSE.
African countries need to do more to attract capital flows especially portfolio flows.
Sustained economic growth, quality public institutions and infrastructure, trade liberalization, and efficient capital markets are important for attracting capital flows (Asiedu, 2006). An enabling business climate with low costs of doing business, property rights, effective regulations and legal institutions, and some capital account liberalization are important.
Capital account restrictions still hold in a number of African countries. Such restrictions also limit the capabilities of exchanges to explore cross-border investments. There is the fear that capital account liberalization for these countries could also expose such economies to potential huge capital flights and financial crises. However, it has been argued that such problems depend on the nature of capital that comes in (Henry, 2000). Debt based capital flows could cause crises if there is bad news and creditors rush in to obtain their funds.
Equity or bond based capital flows however have the risk shared, with high payouts during good times and little or nothing during bad times. Therefore, lifting capital account restrictions to attract portfolio investment would benefit African stock markets tremendously.
Off course capital account liberalization should be preceded by trade liberalization and domestic financial liberalization to minimize financial market risks.
The problem with portfolio capital is that they are normally targeted at large and growing markets. This makes further argument for de-fragmentation of African. Attracting portfolio capital flows into stock markets goes hand in hand with opening up markets for foreign investor participation. Apart from the injection of fresh capital, opening up markets to foreign participants help to increase trading and liquidity of markets. Increasingly African markets are opening up to foreign participation with little or no ceilings on foreign ownership of shares. A few markets still have some foreign participation restrictions. For instance, foreign ownership of shares cannot exceed 40% in stock markets in Kenya and Zimbabwe and 74% in the Ghana.
IMF Working Paper African Department Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges Prepared by Charles Amo Yartey and Charles Komla Adjasi August 2007
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