After an exacting year, East African capital markets are once again on the radars of institutional investors as their economies show remarkable resilience to the pandemic. Kenya, for example, is expected to see GDP growth of 6.4% this year, while Uganda’s economy is forecast to expand by 4.93%. In Tanzania, experts anticipate the country’s GDP will increase anywhere between 3% and 5.3%. Gideon Chokah, Head of Securities Services and Investors and Intermediaries for Kenya and East Africa at Standard Chartered, outlines how inflows into these three East African countries are being facilitated through a combination of prudent regulatory reforms; the launch of new financial products and a market-wide willingness to embrace digitalisation.
Acting fast in a crisis
The actions of East African regulators and financial market infrastructures (FMIs) during the peak of the pandemic have won plaudits from global investors. In order to mitigate market disruption, regulators and FMIs in the region worked tirelessly to digitalise activities such as account openings and corporate actions. The changes have also made it easier for investors to participate in the local markets, in what should result in further inflows over the next few years. “With the imposition of remote working, market participants were forced to adapt quickly, and they did so. The authorities also had to address and update legacy rules. For example, Kenyan legislation stated that AGMs must be held physically. COVID-19 meant that new rules had to be introduced in Kenya to facilitate remote AGMs and voting,” said Chokah. Custodian banks and investors have urged local regulators to retain these digital processes, citing the operational efficiencies which they bring.
Give the investors what they want
Inflows into East Africa are also being enabled through the development and launch of new investment products, a move which is helping to generate deeper regional liquidity. Kenya, for example, has introduced Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), derivatives and green bonds, as it looks to attract more foreign investment. Despite COVID-19 causing unprecedented disruption, Chokah said Kenya’s regulator – the Capital Markets Authority – was still committed to launching new investment tools such as securities lending, securities borrowing and short-selling. These products are critical in ensuring proper price discovery and shoring up liquidity, he continued. FOREX markets in Kenya, Uganda and Tanzania were also liberalised relatively recently making it easier for foreign investors to repatriate funds. Unlike other major African markets, Chokah noted that these countries did not impose FX controls during the pandemic. Investor flows into East Africa will continue to rise as a wider and more diverse range of products comes to market.
The stakes are high for regional consolidation
Reforms designed to promote deeper regional consolidation are likely to usher in greater inflows, and with it liquidity, according to Chokah. While it is true that previous efforts to integrate East Africa’s capital markets were not particularly successful, Chokah said progress around the Africa Exchanges Linkage Project (AELP) - was making better headway, having faced minor delays at the beginning of the pandemic. The AELP is an initiative comprising of the Nairobi Stock Exchange, the Nigerian Stock Exchange, the Egyptian Exchange, the Casablanca Stock Exchange, the Stock Exchange of Mauritius and the BRVM of eight West African markets, and aims to support easier cross-border trading, listing and settlement across these FMIs. The AELP should help further accelerate inflows into the region.
Outperforming in a crisis
Initially, East African markets were widely considered to be incredibly vulnerable to the COVID-19 turmoil but the region has recuperated much faster than many people would have expected. In post-trade circles, East African countries digitalised their archaic manual processes quickly, helping to minimise disruption for global investors. At the same time, efforts to improve market liquidity - through the development of new investment products and regional FMI connectivity channels - are gathering momentum. By pursuing these bold initiatives, inflows from foreign investors into African capital markets will continue to accumulate in the months and years ahead.