1. 1 Financial Integration in African Emerging Markets African Economic Conference 2013 Regional Integration In Africa October 28-30, 2013 Johannesburg, South Africa Financial Integration in African Emerging Markets African Economic Conference 2013 Regional Integration In Africa October 28-30, 2013 Johannesburg, South Africa Dr. Sally Farid Economic Lecturer at Institute of African Researches and Studies, Cairo University, Egypt,

2. 2 Outline Stock Exchanges in Africa: An Overview. Stock Exchanges in Africa: An Overview. Moves towards Regional Integration amongst Stock Exchanges Moves towards Regional Integration amongst Stock Exchanges Progress towards Regional Integration Progress towards Regional Integration Methodology. Methodology. Impact of regional financial integration in Africa. Impact of regional financial integration in Africa. Conclusions. Conclusions. Global Context Global Context African Context African Context Current Approaches in Africa Current Approaches in Africa Moving Forward Moving Forward

3. 3 Stock Exchanges in Africa: An Overview The stock markets in Africa can usefully be divided into four categories: South Africa, which dominates other African stock markets in terms of both size and sophistication. South Africa, which dominates other African stock markets in terms of both size and sophistication. A group of medium sized markets, many of which have been established for a long time (e.g., Egypt, Nigeria, Zimbabwe). A group of medium sized markets, many of which have been established for a long time (e.g., Egypt, Nigeria, Zimbabwe). Small new markets that have shown rapid growth (e.g., Botswana, Mauritius, Ghana). Small new markets that have shown rapid growth (e.g., Botswana, Mauritius, Ghana). Small new markets that have yet to take off (e.g., Swaziland, Zambia). Small new markets that have yet to take off (e.g., Swaziland, Zambia).

4. 4 African stock markets represent less than 2% of the world market capitalisation. The JSE accounts for close to 75 % of the total and is ranked on the 19th position in the world money market as concerns share capital market value. African stock markets represent less than 2% of the world market capitalisation. The JSE accounts for close to 75 % of the total and is ranked on the 19th position in the world money market as concerns share capital market value. The second stock market in Africa, Cairo and Alexandria Stock Exchange, only represents 10 % of the African total. In general, the performances of African stock markets are weak and their liquidity is limited. The second stock market in Africa, Cairo and Alexandria Stock Exchange, only represents 10 % of the African total. In general, the performances of African stock markets are weak and their liquidity is limited.

5. 5 Moves towards Regional Integration amongst Stock Exchanges As African stock markets have become larger and more widespread over the past decade, there have also been preliminary moves towards regional integration amongst these exchanges. This reflects both the needs of the exchanges themselves and the broader process of regional integration. As African stock markets have become larger and more widespread over the past decade, there have also been preliminary moves towards regional integration amongst these exchanges. This reflects both the needs of the exchanges themselves and the broader process of regional integration. The latter, however, has generally started with trade liberalisation and integration, whereas regional integration amongst stock markets, being part of capital market integration, has generally progressed more slowly. The latter, however, has generally started with trade liberalisation and integration, whereas regional integration amongst stock markets, being part of capital market integration, has generally progressed more slowly.

6. 6 Constraints to Regional Integration of Stock Exchanges most African stock exchanges (that is, apart from South Africa) are small and illiquid. This acts as a major constraint to attracting inflows of foreign capital (portfolio investment), which is one of the major objectives of establishing a stock exchange. most African stock exchanges (that is, apart from South Africa) are small and illiquid. This acts as a major constraint to attracting inflows of foreign capital (portfolio investment), which is one of the major objectives of establishing a stock exchange. the range of shares on offer is limited, and the size of potential deals is often small. the range of shares on offer is limited, and the size of potential deals is often small. making cross-comparisons within sectors and across companies is difficult if there are few stocks and if not all economic sectors are represented; hence the relative performance of different companies is difficult to establish. making cross-comparisons within sectors and across companies is difficult if there are few stocks and if not all economic sectors are represented; hence the relative performance of different companies is difficult to establish.

7. 7 the illiquidity of exchanges means that the pricing process is not well developed. This leads to mispricing and a lack of efficiency, which in turn means that capital is not properly priced, so that disciplinary role of stock markets (rewarding good performers and punishing bad ones) may not work fully. the illiquidity of exchanges means that the pricing process is not well developed. This leads to mispricing and a lack of efficiency, which in turn means that capital is not properly priced, so that disciplinary role of stock markets (rewarding good performers and punishing bad ones) may not work fully. poor telecommunication and computer technologies within many African countries, with a great diversity in the levels of automation and of the systems applied. poor telecommunication and computer technologies within many African countries, with a great diversity in the levels of automation and of the systems applied.

8. 8 Steps for Integration The integration of the financial markets requires to create the enabling environment. This environment could be attained through common policies, institutions and regional frameworks and, above all, the necessary political commitment. The integration of the financial markets requires to create the enabling environment. This environment could be attained through common policies, institutions and regional frameworks and, above all, the necessary political commitment. ensure that there is macroeconomic stability and an independent central bank committed to price stability so that the real value of financial assets is protected. ensure that there is macroeconomic stability and an independent central bank committed to price stability so that the real value of financial assets is protected. National policies must also be pro-growth and the capital markets backed by strong legal, regulatory and supervisory mechanisms as well as good general economic and corporate governance and a respect for property rights. National policies must also be pro-growth and the capital markets backed by strong legal, regulatory and supervisory mechanisms as well as good general economic and corporate governance and a respect for property rights.

9. 9 Progress towards Regional Integration The advantages expected from setting-up this market at the continental level: increase the depth and the liquidity of the present financial market, attract higher volume of resources towards investment, promote the modernization and efficiency of financial operations, develop intra-continental trade and economic growth, promote competition among enterprises on the one hand and between the banking sectors and the non- banking financial sector on the other, benefit from economies of scale and reduce the administrative burden of international enterprises. The advantages expected from setting-up this market at the continental level: increase the depth and the liquidity of the present financial market, attract higher volume of resources towards investment, promote the modernization and efficiency of financial operations, develop intra-continental trade and economic growth, promote competition among enterprises on the one hand and between the banking sectors and the non- banking financial sector on the other, benefit from economies of scale and reduce the administrative burden of international enterprises.

10. 10 Current Integration Approaches in Africa Efforts have been at the Regional Economic Community (REC) level although there have been discussions of a Pan- African Stock Exchange at the AU level Efforts have been at the Regional Economic Community (REC) level although there have been discussions of a Pan- African Stock Exchange at the AU level North African exchanges and alliances with Middle East markets North African exchanges and alliances with Middle East markets SADC initiative (a lot of work done towards harmonisation of rules) SADC initiative (a lot of work done towards harmonisation of rules) EAC initiative (a lot of work done towards harmonisation of rules) EAC initiative (a lot of work done towards harmonisation of rules) CEMAC initiative (BVMAC and DSE are exploring integration options) CEMAC initiative (BVMAC and DSE are exploring integration options) ECOWAS initiative ECOWAS initiative OUEMOA bloc has a single market – BRVM, and single regulator OUEMOA bloc has a single market – BRVM, and single regulator WAMZ bloc has 2 formal exchanges and some OTC markets WAMZ bloc has 2 formal exchanges and some OTC markets 2 blocs are currently working on an integration model 2 blocs are currently working on an integration model

11. 11 Moving Forward-II The process should be market-driven The process should be market-driven supported by appropriate policies, systems, and rules supported by appropriate policies, systems, and rules Must involve clearly defined objectives Must involve clearly defined objectives Must involve concrete steps to remove barriers in order to achieve the desired levels of cross-border mobility of capital and financial services Must involve concrete steps to remove barriers in order to achieve the desired levels of cross-border mobility of capital and financial services

12. 12 Moving Forward-III Keep the regulatory burden on issuers and market operators to a minimum while not sacrificing the legitimate objectives of regulation Keep the regulatory burden on issuers and market operators to a minimum while not sacrificing the legitimate objectives of regulation Improved regulatory capacity to protect investors in an integrated market Improved regulatory capacity to protect investors in an integrated market by improved market surveillance, investigative and enforcement systems by improved market surveillance, investigative and enforcement systems improved cooperation with other financial services regulators (insurance, banking, pensions) improved cooperation with other financial services regulators (insurance, banking, pensions) Deal with other impediments e.g. Deal with other impediments e.g. Payment systems Payment systems ICT and Infrastructure ICT and Infrastructure Currency convertibility Currency convertibility Exchange control restrictions Exchange control restrictions Accounting and audit standards Accounting and audit standards Corporate governance standards Corporate governance standards

13. 13 Moving Forward-IV Build on work currently being done by exchanges and regulators Build on work currently being done by exchanges and regulators Agree common minimum standards for adoption based on international standards Agree common minimum standards for adoption based on international standards IOSCO, etc IOSCO, etc Work on joint training standards and standards of professional conduct for market professionals Work on joint training standards and standards of professional conduct for market professionals Develop investor education programmes and facilities Develop investor education programmes and facilities

14. 14 Implementation Challenges So much work to be done and fast too So much work to be done and fast too..but reforms can the phased out..but reforms can the phased out Resource and capacity constraints Resource and capacity constraints Integration is expensive! Integration is expensive! Ensuing a smooth transition to integrated markets Ensuing a smooth transition to integrated markets Role of bodies like ASEA Role of bodies like ASEA -dissemination of good practices, providing dialogue platforms, etc

15. Methodology This study uses a sample of African countries. Our panel data covers the period of 1980 to 2010, allowing us to examine the effects of extensive economic and structural changes over those years. This study uses a sample of African countries. Our panel data covers the period of 1980 to 2010, allowing us to examine the effects of extensive economic and structural changes over those years. To assess the relationship between financial integration, financial development and economic growth in Africa, we utilize the Generalized Method of Moments (GMM) approach for panel data analyses. To assess the relationship between financial integration, financial development and economic growth in Africa, we utilize the Generalized Method of Moments (GMM) approach for panel data analyses. 15

16. The finding indicates that African economies that were more open to international capital flows during the period of our study do not seem to growth faster than the rest. The finding indicates that African economies that were more open to international capital flows during the period of our study do not seem to growth faster than the rest. This lack of a robust relationship between international financial integration and economic growth, even under this dynamic panel estimation technique, that addresses potential endogeneity (between capital flow and GDP). This lack of a robust relationship between international financial integration and economic growth, even under this dynamic panel estimation technique, that addresses potential endogeneity (between capital flow and GDP). 16

17. Impact of Regional Financial Integration in Africa Strong financial markets and institutions play an important role in supporting economic development, because they enhance the exchange of goods and services, the mobilization of resources (both domestic and international), the efficient allocation of factors of production, and the diversification of risk. Strong financial markets and institutions play an important role in supporting economic development, because they enhance the exchange of goods and services, the mobilization of resources (both domestic and international), the efficient allocation of factors of production, and the diversification of risk. 17

18. Although some form of financial development has taken place in Africa in recent years, financial market activities remain very shallow, with low capitalization and inadequate liquidity in capital markets. Most financial instruments issued in Africa have very short-term maturities. Bank financing continues to be concentrated at the short end of the term structure. Although some form of financial development has taken place in Africa in recent years, financial market activities remain very shallow, with low capitalization and inadequate liquidity in capital markets. Most financial instruments issued in Africa have very short-term maturities. Bank financing continues to be concentrated at the short end of the term structure. 18

19. Finally, Africa needs deep, efficient and well-established financial markets, including bond markets and stock exchanges, to mobilize the necessary domestic resources to support its development objectives, particularly the Millennium Development Goals (MDGs). Finally, Africa needs deep, efficient and well-established financial markets, including bond markets and stock exchanges, to mobilize the necessary domestic resources to support its development objectives, particularly the Millennium Development Goals (MDGs). These markets would help increase the quantity and productivity of investment, bolster competition in the financial sector, and improve corporate governance. Furthermore, capital markets provide policymakers with an array of tools to conduct monetary policy also serve as vehicles for Africa to integrate into the global economy. These markets would help increase the quantity and productivity of investment, bolster competition in the financial sector, and improve corporate governance. Furthermore, capital markets provide policymakers with an array of tools to conduct monetary policy also serve as vehicles for Africa to integrate into the global economy. 19

20. 20 Conclusion Conclusion Integration of African capital markets must result in Integration of African capital markets must result in efficient allocation of capital across the continent efficient allocation of capital across the continent Increased access by entrepreneurs (small, medium, large), governments, and municipalities to appropriate financing options for productivity Increased access by entrepreneurs (small, medium, large), governments, and municipalities to appropriate financing options for productivity Increased access to a decent portfolio of instruments for financial planning towards a better life for the average African Increased access to a decent portfolio of instruments for financial planning towards a better life for the average African Ultimately, higher growth rates, and better livelihoods. Ultimately, higher growth rates, and better livelihoods.