There has been talk of market infrastructures in Africa improving very quickly. What have been the main drivers of this?
Market infrastructures in Africa have experienced impressive growth over the last decade. This growth has been a result of various reasons.
Firstly, we have seen entrenched democratic values and more open economic policies. The political landscape of Africa had been experiencing relative stability with democracy taking roots and the number of dictatorships declining at a great pace, especially in sub-Saharan Africa, with the exception of one or two non-conforming outliers. The positives of political stability have led to enhanced and robust economic policies with the support of global financial entities like the Bretton Woods Institutions, African Development Bank and other multilateral agencies.
There has been an increase in foreign direct investment flows into frontier markets. We have seen increased interest in African markets from offshore investors since the 2008 and 2009 global financial crisis, as most African countries were seen as providing opportunities to buck the global trend and offer some diversification potentials.
African countries are also increasingly listed on global indices. Nigeria experienced a quantum lift in inflows with the listing of Nigerian sovereign bonds on the J.P. Morgan GBI-EM Index and the Barclays index. Similarly, its equities market experienced a boost with the listing of its exchange on MSCI Frontier Market Index.
With the reforms introduced into the pensions markets of several African countries, such as Nigeria and South Africa, and other sub-Saharan markets, the infrastructure increased in leaps and bounds to meet the new demands.
We have also seen a positive impact of reverse brain drain. The crisis of 2008 and 2009 led to the return of quite a number of Africans who were working in top flight financial organisations. Their return to Africa led to the benefits of talent and contacts, which was valuable to the continent’s capital markets in terms of structures and opportunities. Leading firms in Ghana, Nigeria and Botswana were reinforced by this positive reversal of brain drain.
With enhanced technological development, especially mobile technology, and the rise of financial technological firms, disruptive technologies have been harnessed by the African markets, as well as in mobile trading devices and in usage of technological messaging platforms like SWIFT, Bloomberg and Reuters EIKON terminals. Mobile brokerage platforms have led to the demolition of trade barriers, for example.
However, in all of the key drivers of market infrastructure, perhaps the most dominant force has been the pressures of competition. The need to keep up with competition ‘or die’ has seen the development and adoption of enhanced market infrastructure on the African continent.
Infrastructure developments referred to here include the use of top-notch international standard software for trading. The Nigerian Stock Exchange acquired the fastest trading system, Nasdaq OMX, in 2013 and the Johannesburg Stock Exchange moved to a T+3 settlement cycle in 2016.
There is increased use of mobile trading platforms such as the ones used by the leading brokerage firms in Nigeria, and increased use of Reuters-based platforms as the minimum trading platform for the FMDQ OTC Exchange in Nigeria for all dealing members in the foreign exchange and fixed income trading market. Finally, we have seen increased adoption of the FIX protocol for transactions, and the introduction of high frequency algorithmic trading software and direct market access.
How has the Nigerian market contributed?
The Nigerian market has been an integral contributor to most of the infrastructural developments seen in the African capital market over the last decade and certainly has been one of the major beneficiaries.
Bearing in mind the recent commodity price slump and the associated foreign exchange crisis, which had resulted in an ongoing recession, Nigeria had hitherto been one of the leading economies in Africa and is currently one of the top three largest economies on the continent following a rebasing of its GDP.
The benefits experienced in the Nigerian market include the introduction of an efficient trading engine for the Nigerian Stock Exchange (NSE), which is not only the fastest and most robust on the continent, but also supports efficiently the hosting of the NASD OTC Exchange platform, another exchange recently launched in Nigeria for OTC equities.
The reform of the market infrastructure of the NSE has led to brokers being able to utilise FIX protocols such as the FIX/Pro-Trader, which gives clients direct market access to the exchange and allows local central securities depository and custodians to utilise SWIFT as a means of communication.
It also introduces custody software and projects like the ongoing development of an electronic certificate of capital importation system to handle cumbersome exchange control documents.
A number of stockbroking firms in Nigeria now offer their clients the ability to trade from their iPads or laptops and other mobile devices. Payment networks are quite extensive and developed, and the use of platforms like Bloomberg and Reuters are also commonplace standards, which has increased the connectivity with the international market.
Are you seeing an increase in Nigerian asset managers investing cross-border?
There has been an increase in investments by Nigerian asset managers cross-border. However, most of these investments are usually into Eurobonds of local entities and sovereign issues, and on a limited scale in global depository receipts.
However, the largest asset managers in Nigeria are currently the pension fund managers. Unfortunately, pension fund managers do not currently invest outside of the shores of Nigeria, due to the stringent investment guidelines they have to comply with. Also, most mutual funds are not allowed by their trust deeds to invest outside of Nigeria. With the recent extensive devaluation of the local currency, the naira, one could argue with hindsight that these investments implicitly have lost some value dollar-wise.
How about investment coming into Nigeria? Where is this interest coming from?
Investments coming into Nigeria have been from global fund managers in the US, the UK, European countries, the Middle East, the Far East and other countries in Africa, especially South Africa. The adjustments in the investment rules in South Africa allowed the pension funds to make significant investments in the Nigerian capital market.
Africa-focused fund managers have Nigeria as a key component of their investment strategies.
The listing of Nigerian bonds in reputable international indices led to a significant upsurge in investments in the capital markets, supported by the freeing up of investment rules by the Central Bank of Nigeria, which allowed investment in government securities without restrictions on tenor. Between 2004 and 2014, stability in the foreign exchange regime supported decisions of foreign investors to view Nigeria as an investment haven, and the decisions to invest were largely driven by the investment analysis of such instruments and its sectors.
What kinds of challenges remain in opening Africa up to international investment?
Africa is a continent that’s still developing, and the slogan ‘Africa rising’ is quite apt. To this end, one would expect there are still challenges that need to be addressed to enhance a continued opening up of the continent for international investments.
A key challenge of the continent is still the influence of politics and policymakers willing to influence economic flow for political purposes. The economic drivers and policymakers like our reserve banks need to be independent, and their decisions should largely be for economic growth and development. Where the reserve board chairman or governor has to react to the body language of the president or prime minister, he could be making sub-par decisions that would impact the flows of investments into the continent.
Other ongoing challenges include:
• Cost of infrastructure development is still relatively high. Most firms find the cost of subscriptions to international trading terminals generally on the high side. Where this could be addressed, for example with communal usage or shared services schemes, trades and investments would improve.
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• Collaboration between countries within the continent and also international counterparts such as fund managers, via integration initiatives such as the West African Capital Market Integration programme and African Securities Exchanges Association, could increase the attractiveness of Africa investments to international investors.
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• Regarding ratings of issues and introduction of new issues, African companies could be encouraged to list and they should also have their issuances rated. Issuers should work towards improving their ratings and sovereign states should also implement efforts to enhance the quality of their ratings.
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• Rules changes in local economies should be improved to make the investments by offshore investors easier.
• Macroeconomic decisions should be made to ensure that investors are attracted. Africa should be a friendly nation to invest in and steps like issuing visas on arrival, having robust statistical bureaus and having one-stop shops for investment enquiries should be encouraged.
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• Where possible, African countries should work towards having their sovereign bonds and exchanges listed on reputable international indices. And where they are removed, they should address reasons for their removal so as to facilitate prompt reinstatement.
African countries should diversify their economic production bases and not be subjected to the intense vagaries of mono-commodity prices globally.
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HSBC
Kapil Seth
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