On their own, smaller emerging markets often struggle to achieve the necessary critical mass in their capital markets to support economic growth. Smaller stock exchanges are often insufficient in scale to justify international investors expending resources to track and invest in them. For this reason, the regional integration of exchanges is a growing trend. Bringing together the exchanges of Chile, Colombia and Peru, the Latin American Integrated Market is a key example. The Bourse Régionale des Valeurs Mobilières (BRVM) is itself a regional stock exchange, already including eight countries. It is dwarfed in scale, however, by more developed single-country exchanges on the continent, such as those of Nigeria or South Africa.
A LONG-STANDING GOAL: By continental standards, West Africa has been something of a trailblazer in economic and monetary integration, through the West African Economic and Monetary Union (Union Économique et Monétaire Ouest-Africaine, UEMOA). Mirroring efforts to create a common market, and ultimately a currency union, within the broader ECOWAS region, integration of capital markets has been a long-standing aspiration.
A merger of the BRVM with the exchanges of Nigeria and Ghana was first mooted back in 2006, when an exploratory committee was established to examine the project’s potential. While this committee is believed to have prepared an interim report, it was never officially published, and no further concrete actions were adopted until these three exchanges and their regulatory authorities signed a memorandum of understanding in 2010, the aim of which was to deepen cooperation, promote mutual assistance and improve consultation and knowledge-sharing among the signatories. However, owing to the distraction of the 2011 Ivoirian political crisis, there was no apparent impetus toward further integration. While Sierra Leone has indicated its interest in participating in the merger in recent years, the process only appeared to gain momentum from mid-2012 onwards.
WACMIC: August 2012 saw a two-day stakeholder conference that charted the next steps for integration. One month later in September, stakeholders came together again in Accra, Ghana, to propose the creation of a West African Capital Markets Integration Council (WACMIC). This process culminated on January 18, 2013 with the inauguration of the WACMIC, a body comprising the director-generals and chief executive officers of the region’s security and exchange commissions and stock exchanges, including both the BRVM and the Regional Council for Public Savings and Capital Markets (Le Conseil Régional de l’Epargne Publique et des Marchés Financiers, CREPMF).
The WACMIC is to be the overarching governance body responsible for step-by-step integration of the region’s financial markets. It is aiming for regional harmonisation of the regulatory environment for the issuance and trading of financial instruments. A first step will be to ensure the mutual recognition of exchanges’ rules and regulations as they currently stand. The WACMIC is also working towards the facilitation of cross-border listings, and ultimately trading such securities on a regionally integrated market. To this end, its members have signed up to a charter that provides for the harmonisation of operational rules and regulations for each of the member states’ stock exchanges. The charter also sets out a roadmap towards full integration. It is likely that the ECOWAS Commission and WACMIC will play key leadership and coordination roles to ensure the merger is achieved.
Under the aegis of the WACMIC, two technical committees have been set up, one to deal with issues relating to quotation, listing and membership, and another to deal with depository, trading, clearing and settlement issues. Membership of these committees is drawn from a variety of sources, including the relevant regional Securities and Exchange Commissions, stock exchanges, depositories, clearing and settlement institutions, market players, brokerage associations, the ECOWAS Commission, the UEMOA Commission and the West African Monetary Institute. These technical committees will provide advice and support to the WACMIC, which has already considered their first report. It is expected that the harmonisation of regional rules and regulations could be finalised by early 2014, while brokers may be in a position to trade securities across the West African region as early as the end of that year. At first, it is envisaged that brokers’ access to the four markets will be facilitated via a regional market “passport” for intermediaries, but a single, unified trading platform remains a longer-term project with a 2020 target date.
BENEFITS: There is an economic imperative to the merger, and it appears that the political will is now there. Integrated regional capital markets are likely to contribute to financial market deepening, increased liquidity and capacity building through the exchange of know-how and competencies. This may be of particular benefit for smaller exchanges, which will profit from improved interaction with the larger and more dynamic Nigerian exchange, for instance.
The integration initiative has been welcomed by industry across the region and has political buy-in at the highest levels, with calls for the process to be fasttracked. The integration of regional capital markets is expected to help mobilise savings, boost investment, cut costs for investors, allocate resources more efficiently and sustain more robust stock exchanges. As well, the choice of financial products on offer to investors across the region is also set to widen, while firms raising capital will likewise be faced with a greater pool of investors. Businesses will also have an alternative to financing from commercial banks, which is costly and challenging to access across the region.
The merger should help to integrate the region’s financial markets with the global economy, thus enhancing its attractiveness for international investors. Ultimately, deeper liquidity in local capital markets can help stimulate economic growth, reduce poverty, and boost economies’ resilience to external shocks.
CHALLENGES: There are, nevertheless, several challenges to overcome. For instance, while the BRVM currently operates as a regional exchange, its constituent members share a currency, language and banking rules. This not the case elsewhere in West Africa, and there are concerns that Nigeria could dominate the market due to its preponderant weight.
More needs to be done to harmonise financial infrastructure across the region to ensure compatibility of electronic trading platforms. For instance, measures are needed to link all of the regional exchanges electronically so that brokers who meet the required standards can access a common trading platform.
Regional brokerages and other market players will also have to build up the capacity to provide advice to investors and execute transactions relating to financial instruments throughout the region. This could lead to partnerships and joint ventures across countries, but may put smaller outfits at a disadvantage.
By comparison, banking groups and financial firms that already have a pan-regional presence will likely have an advantage at the outset in this regard. Outside the remit of the stock exchanges, their regulators and direct stakeholders, there will also likely be a need for countries in the region to relax foreign exchange controls and reduce or eliminate withholding taxes so as to facilitate capital flows. Regional governments and central banks, including the regional Central Bank, will thus play a key supporting role.
MOMENTUM: Although long-mooted, the integration of regional capital markets has gained momentum since mid-2012. Actions are now being taken towards a convergence in the regulatory frameworks of the four markets. While the completion of regulatory harmonisation by early 2014, and region-wide trading by late 2014, may be ambitious targets, they demonstrate how seriously the authorities are treating the project. In the interim, it is expected that enhanced cooperation, including more dual listings, will be the clearest manifestation of integration.
Ultimately, merging financial markets will not deliver the potential benefits that have been ascribed to the project on its own. Concerted efforts to improve the business environment generally, including the easing of access to credit through the commercial banking system, are also important to the development of a deeper, wider financial sector supportive of economic growth in the region.
The BRVM may have much to gain from wider regional integration, but this should not distract from the important work it is undertaking to get its house in order. From an Ivoirian and UEMOA perspective, it is crucial that innovations such as the development of an SME-dedicated compartment of the stock market are not sidetracked as efforts are stepped up to promote regional integration. In the future, there may be greater scope to extend cooperation into the Central African region, facilitating transactions with its stock exchange, the BVMAC. This development may be of particular relevance if proposals to merge the West and Central CFA currency unions are ever progressed.
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