Interview: Sam Mensah
How can the integration of regional stock exchanges benefit ECOWAS overall?
SAM MENSAH: Financial markets have a broadly positive impact on development due to the economic functions they play: mobilisation of resources, provision of investment opportunities and risk management. But the ability of the markets to deliver those benefits really depends on their structure. A number of constraints can hinder the development of some markets. One such constraint is size – if a market is too small the transaction costs of operating in the market are very high, as the market does not have economies of scale. When markets are small it is difficult for them to improve their facilities, including trading platforms. They are too small to afford that level of overhead.
The move towards integration of the markets is partly about developing economies of scale that will reduce the disadvantages of these African markets. Thus, if the stock exchanges of Nigeria, Ghana and the regional exchange in Cote d’Ivoire come together, a number of things can happen.
Firstly there is access to a wider pool of capital; companies interested in raising capital are not just limited to the country where they are listed. This is a great opportunity for investors too. With integration, over 300 listings suddenly become available, and institutional investors are able to diversify their portfolios. With that kind of overall diversification it actually reduces volatility for markets as a whole.
Finally, with a regionally integrated market there is no need for countries without exchanges, such as Liberia, Sierra Leone and Guinea, to develop their own, which would most likely be inefficient anyway – again due to size. They can then all plug in to the regional network and leapfrog the process of growing their markets to a minimum size.
The integration of the stock exchanges has a much wider impact on regional integration. Capital can move freely across borders, which allows for bigger companies to operate in the region. There can also be improved and expanded trading with regional payment systems. There is, therefore, no question that the integration of stock exchanges – and the integration of financial sectors as a whole – will be able to support the development of the real economy in the entire region.
What are the biggest challenges faced in integrating the regional stock exchanges?
MENSAH: The most challenging aspect of harmonisation is the regulatory framework. The West African Capital Markets Integration Council has developed a body that has both market operators and regulators. The operators are thus not working in isolation from the regulators. Amending the laws of countries to produce regional standards is challenging given the two major languages and the fact that Anglophone countries operate on the common law system while Francophone countries operate on the civil law system. However, there is enough integration to be done at this point without amending any laws. I would even imagine that the legal integration would occur through an ECOWAS framework and not a country initiative.
What impact have Tier 2 pension funds had on growth of the Ghana Stock Exchange in 2013?
MENSAH: Many of the Tier 2 pension funds came into existence in 2013, and this is money that needed to be invested. Tier 2 funds therefore played a role in the market’s strong performance in 2013, as there were no major developments in terms of fundamentals that could actually explain the market’s successful 2013 performance. However, I don’t want to overemphasise the impact of Tier 2, as even without these funds small exchanges on the continent often go through boom and bust cycles. I do not foresee Tier 2 pension funds making a wholesale leap into the equities market. Institutional investors are certainly aware of the volatility of the market. Therefore, although they want to keep a diversified portfolio by including equities, there is a limit to how far they want to be exposed to equities.
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