The Dar es Salaam Stock Exchange (DSE) has evolved impressively since its establishment in 1996, and its recent demutualisation has ushered in a new phase of market development. Updated regulations, products and infrastructure are under way as exchange authorities position the DSE to attract much-needed liquidity. However, 2016 was a challenging year from an investment perspective. The effects of national economic reform are being felt in numerous sectors, and market uncertainty is likely to persist over the medium term. For this reason attracting liquidity through new listings and market innovation has become a central priority.
Rapid Development
The history of formal capital markets in Tanzania is a relatively short one, beginning with the formation of the Capital Markets and Securities Authority (CMSA) in 1996. This was an important turning point in the nation’s economic history. After decades of centralised economic policy following Tanzania’s independence in 1961, the country opted to pursue an open market system. The economy, however, was dominated by around 700 parastatal companies, which meant the development of an organised capital market was central to cultivating the private sector.
Initially, the CMSA proposed a two-tiered equities market as a suitable starting point, allowing for different listing requirements for large- and small-cap companies. However, by the time the DSE began to admit firms in 1998, a less-risky single-tier platform was chosen, as it would provide investors some assurance of returns. By the end of the first year of operations, two businesses had listed on the DSE: Tanzania Oxygen – now known as TOL Gases – and Tanzania Breweries. Similar to stock markets elsewhere on the continent, the immaturity of the private sector meant a slow materialisation of further listings, but the exchange nonetheless served as a catalyst to the gradual liberalisation of the economy. The first privatisation and listing of a state-owned entity came in 1998, and by 2015 a total of seven had undergone a similar process.
The market also began to broaden its product offering at a relatively early stage of its development. Just four years after the establishment of its equities platform, the DSE created a debt market that allowed for trade in Treasury and corporate bonds. Other important milestones were reached over the next decade: the DSE installed its first automated trading system (ATS) in 2006, published its framework for real estate investment trusts in 2011, migrated to a more efficient ATS and central depository system in 2013, and in 2014 it revised rules for the bourse, which, among other things, removed caps for foreign investors. The initially proposed second-tier market was also introduced in 2013, providing a platform for medium- and small-cap firms to raise capital without having to meet the more stringent listing requirements of the main board.
New Phase
Recently, the DSE has started a new chapter in its history. Towards the end of FY 2015/16 the exchange went through a process of demutualisation, whereby it was transformed from a non-profit, member-owned organisation into a profit-making, investor-owned corporation. In order to accomplish this, the DSE conducted its own initial public offering (IPO), in which it raised TSh35.6bn ($16.2m), nearly five times the target of TSh7.5bn ($3.4m), and in July 2016 DSE shares were listed on the exchange. In undertaking this process, the DSE followed a global trend, which includes the New York’s Nasdaq, which demutualised in 2000, and the London Stock Exchange, which followed suit in 2001. The DSE has become the third African bourse to undergo a demutualisation process, following the Johannesburg Stock Exchange in 2006 and the Nairobi Securities Exchange (NSE) in 2014. Adding a profit motive is expected to add impetus for the institution to better adapt to rising global competition, accommodate technological advances and implement best practices in areas such as corporate governance.
Regional Upgrade
Along with the exchanges of Rwanda, Kenya and Uganda, the DSE is a member of the East African Securities Exchanges Association (EASEA). This regulatory body has become increasingly influential in the strategic direction of the region’s capital markets, with integration being the eventual goal. In 2017 it was in the process of implementing its Capital Markets Infrastructure Project, which will enable investors to trade shares across all participating bourses without having to move from market to market. It is also establishing a range of protocols and industry standards that members are incorporating into their respective legislative frameworks. As a result, while the DSE maintains an independent expansion strategy, any analysis of its future direction must take into account its position within the EASEA (see analysis).
Market Structure
The DSE has evolved from a single-tier equities trading platform into an increasingly vibrant tripartite structure, comprising two equities markets and a debt market. The main board, or the Tier-1 equities market, is subdivided into three subsectors, each with its own index: the Banking, Finance and Investment Index; Industrial and Allied Index; and the Commercial Services Index. The Tanzania Share Index (TSI) and the All Share Index (DSEI) are the principal means by which investors can track the overall market.
The TSI tracks local stocks only, while the DSEI includes stocks of foreign companies that have crosslisted on the DSE. These include East African Breweries and Kenya Airways, which are both listed on the Uganda Securities Exchange and the NSE, as well as Kenya Commercial Bank Group, Nation Media Group and Uchumi Supermarkets, which are all cross-listed in Kenya, Uganda and Rwanda.
At the end of 2017 a total of 26 companies were listed on the public equities market, eight of which were cross-listed and 19 of which were domestic firms. Their activities reflect the diversity of the private sector, encompassing brewing, tea and coffee, cement, cigarettes, aviation and cargo handling, banking, investment, insurance, publishing and broadcast media, mining, oil and gas exploration, and retail.
Attracting new and high-quality listings to the market is a priority for exchanges across the region, and one of the ways the DSE has sought to achieve this is by establishing a second-tier equities market for smaller companies. Inaugurated in 2013, the Enterprise Growth Market (EGM) is governed by a similar legislative framework as the main board in core areas such as trading, clearance, settlement and share transfers, but is made accessible to smaller companies by a more lenient approach to certain criteria, such as capital and reporting requirements. While the EGM represents a useful route to funding for Tanzania’s medium- and small-cap firms, it has yet to gather momentum. At the outset of 2017 the market had five listings and a market capitalisation in the region of TSh120bn ($54.6m). Nevertheless, the EGM has the potential to become a useful stepping stone to the main board and a catalyst for growth in the wider economy (see analysis).
Bonds
The DSE’s debt market activity is dominated by a regular supply of Treasury bonds. As of late 2017 there were 139 government bonds outstanding. The government bond programme is made up of instruments that mature after a period of two, five, seven, 10 and 15 years at interest rates of 7.82%, 9.18%, 10.08%, 11.44% and 13.5%, respectively. The value of government bonds traded rose by nearly 21% in 2016 to TSh459bn ($208.8m), against a fall in equity trading.
As is common in Africa, corporate issuances play a smaller role in the market. In FY 2015/16 there were two issuances: a six-year, exchange-traded retail bond from Tanzania’s Exim Bank worth TSh10bn ($4.5m), and the first tranche of a TSh200bn ($91m) medium-term note from National Microfinance Bank. In late 2017 there were just three outstanding corporate bonds, with tenors ranging from three to 10 years.
Foreign Exposure
The DSE is not prominent in a global investment context as a frontier market, and it does not benefit from the passive inflows of internationally managed funds. Regionally, the DSE competes with other developing exchanges, all of which are attempting to claim a share of scarce capital streams. A 2016 survey of African exchanges by PwC showed that the Tanzanian market is part of an emerging sub-Saharan group of bourses with market caps, excluding cross-listed stocks, of between $1bn and $6bn. This group includes Namibia, Botswana, Zimbabwe, Zambia, Uganda and Ghana. Kenya and Nigeria, with market caps of between $6bn and $30bn, are part of a more developed category. Global investors looking for African exposure also have the option of more advanced markets with capitalisations of over $30bn, such as those of South Africa, Morocco and Egypt.
With regional competition growing more intense, attracting foreign investors has become strategically important. Investors from outside of the country have always played a large role in providing liquidity on the DSE, but until recently they were limited by a cap of 60% ownership of a company’s issued share capital. This limitation was removed in 2014 in a bid to attract larger inflows of capital. The increasing openness of the Tanzanian market, combined with the small size of the domestic investment community, means that foreign nationals create the bulk of trading activity on the DSE. According to the CMSA, foreign investors accounted for 90.1% of buy-side activity in FY 2015/16.
Performance
Attracting new investors is always easier during periods of buoyant stock prices, particularly on exchanges such as the DSE where short selling is not an option. The bourse’s recent performance history, however, has been mixed. After following an upward trajectory throughout 2013 and 2014, the DSEI hit its most recent high in the summer of 2015, but began to fall over the rest of the year. While much of the gains made in 2013 and 2014 have been retained, 2016 was a challenging year for the index.
In early 2017 George Fumbuka, CEO of Core Securities, a licensed DSE member, told local press that participation of foreign investors, the 2015 general elections and a liquidity crunch were the main factors stagnating growth. He added that the surge in interest among foreign investors was a major precursor to many of the falls in share prices in 2016, which was essentially a market correction following a period of overvaluation.
While 2016 saw generally flat or negative growth, the listing of the DSE on the exchange provided a useful market boost in July, with the main index climbing towards its 2015 high. Nevertheless, the market closed the year on a downward track, with market capitalisation declining by 9% to TSh21.7trn ($9.9bn). Domestic market capitalisation fell more sharply, by just over 20%, to TSh7.9trn ($3.6bn). The Industrial and Allied Index showed the biggest drop for the year, with a 22% decrease. This trend was powered by losses among cement stocks, a reaction to rising competition in the sector and a slowing real estate development market.
Performance continued on this trend during the first half of 2017, though by the final quarter some gains were being made. Total market capitalisation rose by 6.5% from the end of 2016 to TSh23.1trn ($10.5bn). The Industrial and Allied Index also recovered, up 18% over the year. After rising in the last quarter the DSEI ended 2017 up 9%, after having fallen 9% in 2016.
IPO Pipeline
Despite a muted performance in 2016, the DSE has seen a number of IPOs. The exchange’s own listing was the most significant of these. Two more domestic listings brought fresh liquidity to the exchange in 2016: Yetu Microfinance Bank, a provider of financial services to unbanked and underbanked populations listed on the EGM; and MUCOBA Bank, a similar institution, listed on the main market.
The IPO pipeline also received a useful legislative fillip in 2016, when the Finance Bill was passed with a requirement that all Tanzanian telecoms companies list 25% of their shares. The first result of this came in August 2017, with the successful completion of Vodacom Tanzania’s IPO. The firm raised TSh476bn ($216.5m) by selling 560m shares at TSh850 ($0.39) per share. Despite delays due to a lack of domestic market interest, Vodacom’s IPO was the largest in the DSE’s history, with more than 40,000 local investors taking part in the sale. Ultimately, 40% of shares were sold to foreign investors. Meanwhile, Airtel Tanzania and Tigo Tanzania, the second- and third-largest telecoms providers, respectively, have not yet had their IPOs approved by the CMSA, because they have not yet met all DSE requirements. As the 2016 Finance Bill requires all domestic telecoms companies to have at least 25% of their shares listed on the exchange, more IPOs are expected in the medium term (see Telecoms chapter).
A similar process is occurring in the mining sector. The Mining Regulations of 2017, published in February of that year, require all companies with special mining licences to float 30% of their issued and paid-up share capital by the end of August 2017 (see Energy & Mining chapter). Acacia Mining, a gold extractor, was the first firm to fulfil the requirement. As with the telecoms sector, the local listing of mining businesses will allow the Tanzanian public to participate in some of the nation’s most capital-intensive sectors. It also grants the government greater oversight of the financial affairs of leading corporations, an important point given its attempts to balance its budget by increasing revenue.
Developing the Market
Another route to a deeper market is to make it a more attractive arena for investment, and the exchange authorities are upgrading both the technical and regulatory functions of the DSE to achieve this. In FY 2016/17 the bourse was in the process of overhauling its clearing, settlement and depository (CSD) infrastructure, combining separate CSD functions of the Bank of Tanzania and the DSE into one unit. The existence of two CSD operations was widely seen as posing significant market risk due to the potential for data conflict. However, the improved infrastructure will provide a more suitable platform for several new products that the DSE is planning to introduce. These include infrastructure bonds and exchange-traded funds, derivatives and futures products, as well as infrastructure financing and sharia-complaint products that will provide an alternative source of funding for the state’s ambitious development plans.
One of the biggest structural changes due in the short term is the establishment of a new commodities exchange. The Tanzania Mercantile Exchange (TMX) has been under development for some time, and in 2017 the CMSA was in the process of finalising the implementation of various operational aspects, such as the TMX Rule Book, commodity contracts, office partitioning and digital network design, as well as preparing the TMX office premises and trading floor. The new exchange will allow for the trade of commodities like coffee, cashew nuts, sesame and maize, which are currently bought and sold under a simple warehouse receipt system. The advent of the TMX brings a number of benefits. Farmers who currently suffer from price fluctuations during the harvest period will now have a transparent price discovery mechanism that will provide them with more income security, while investors will have new products with which to diversify their portfolios. The TMX is one of several commodity exchanges on the continent in various stages of development, with countries such as Ghana looking to establish similar markets.
The CMSA has also been looking for ways to boost liquidity in the bond market and plans to revise its model upon completion of a comprehensive study. It has already commenced work on a new micro-savings product, M-Akiba, that will allow a larger proportion of the population to participate in the market. On the regulatory side, the review of the Capital Markets and Securities Act continues, while the corporate governance framework is also a likely target for reform.
Outlook
The listing of telecoms and mining companies as a result of new legal requirements will provide a regular schedule of new investment opportunities in the medium term. The rate of IPO activity, however, remains uncertain. While firms are applying to list on the DSE to meet specified deadlines, the arrangement and timing of a subsequent IPO is likely to be tailored to suit market conditions. There is also a question of market appetite. In the case of Vodacom’s 2017 IPO, the offering period’s extended deadline led some observers to suggest that the market was facing a liquidity challenge. However, the CMSA has stated that the extension was granted due to the size of the offer, and to allow more participation from retail investors and foreigners.
The inauguration and subsequent development of the new commodities exchange is also likely to be a major priority. Once the platform is operational, the CMSA and TMX will focus on increasing the number of contracts processed, introducing futures and building capacity among exchange staff and intermediaries. According to the CMSA, market dissemination tools, such as price tickers in rural areas and education programmes for farmers and policymakers, will also be key.
In terms of index growth, much depends on the direction of the broader national economy. With GDP growth for 2018 estimated to reach 6.8% by the IMF, the DSE stands to benefit from economic activity that is continuing to expand (see Economy chapter). However, an ongoing process of economic reform centred on fiscal consolidation represents a downside risk both to economic growth and to the likelihood of the main index returning to a sustained upward trajectory.
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