Over the past few decades, the world stock markets have surged, and emerging markets have accounted for a large amount of this boom. In Africa, new stock markets have been established in Ghana, Malawi, Swaziland, Uganda, and Zambia. The rapid development of stock markets in Africa does not mean that even the most advanced African stock markets are mature. In most stock markets, trading occurs in only a few stocks which account for a considerable part of the total market capitalization. In addition, the market suffers from the problem of low liquidity. Low liquidity means that it will be harder to support a local market with its own trading system, market analysis, brokers, and the like because the business volume would simply be too low.
The analysis in this paper shows that the stock market has been a surprisingly important source of finance for funding the growth of large corporations in some African countries. In Ghana, the stock market financed about 12 percent of total assets growth of listed companies between 1995 and 2002. In South Africa, new equity issues accounted for 18 percent of total assets growth between 1996 and 2000. External debt contributed 61 percent of total financing, and retained earnings financed the remaining 21 percent. In Zimbabwe, equity finance contributed 8 percent to the funding of listed corporations between 1990 and 1999. In all of these countries, the stock market is the most important source of long term external finance.
Thus, the stock market has made important contributions to corporate growth in Africa in the recent period. However, the shortcomings inherent in a stock market based system require us to examine whether the economy as whole has benefited through, for example, greater aggregate savings and investment or increased productivity of investment. There is little systematic evidence on this issue for African countries. We provide some econometric evidence, however, that through the value of shares traded, the stock market is positively associated with economic growth in Africa. This result might however also be because of the dominance of the price effect.
What determines stock market development? Recent empirical research has identified macroeconomic stability, robust economic growth, well developed banking sector, and good quality institutions as important for stock market development. Garcia and Liu (1999) found income level, banking sector development, domestic savings and investment, and stock market liquidity as important determinants of stock market development in emerging markets. Yartey (2007b) finds that a percentage point increase in financial intermediary sector development increases stock market development in Africa by 0.597 percentage points controlling for macroeconomic stability, the level of economic development, and the quality of legal and political institutions. He also finds good quality institutions such as law and order, democratic accountability and limited corruption as important determinants of stock market development because they reduce political risk and enhance the viability of external finance.
Looking ahead, African stock exchanges face a number of challenges before they could enter a new phase of rapid growth. The first is the challenge of stock market integration. Many analysts have argued for the regionalization of stock markets in Africa as a way of addressing the problem of low liquidity. Preconditions for successful regional approaches include harmonization of legislations such as bankruptcy and accounting laws and a liberalized trade regime. The second is the challenge of demutualization to solve the governance and profitability problems. Demutualization would be more relevant after African stock markets have consolidated gains on technological and regulatory reforms. The third and most critical issue is the need to eliminate existing impediments to institutional development. These include a wider dissemination of information on these markets, the implementation of robust electronic trading systems, and the adoption of central depository systems. In addition, sound legal and accounting framework, private sector credit evaluation capabilities, and public sector regulatory oversight should all be strengthened.
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
To learn more about this author, visit International Monetary Fund's Website.
Like this article? Share it with your friends
|
|
International Monetary Fund
(Visit International's Website)
The IMF is an international organization
of 185 member countries. It was
established to promote international
monetary cooperation, exchange stability,
and orderly exchange arrangements; to
foster economic growth and high levels of
employment; and to provide temporary
financial assistance to countries to help
ease balance of payments adjustment.
Since the IMF was established its purposes
have remained unchanged but its
operations—which involve surveillance,
financial assistance, and technical
assistance—have developed to meet the
changing needs of its member countries in
an evolving world economy.
|
|
|
International Monetary Fund's
Complete
List Of
African-Accounts
Articles
|
|
If you enjoyed this article, get International Monetary Fund's Complete List of African-Accounts Articles For FREE!
|
|
|
|
![[Get Copyright Permissions]](http://license.icopyright.net/images/icopy-w.gif){kind=small}
