Despite their strong economic growth in Q1 2022, highly favourable demographics, and predilection towards embracing innovation, East African markets are likely to face some challenging times ahead. Monetary tightening by the region’s Central Banks coupled with rising food and energy prices will put serious pressure on a number of East Africa’s economies. Although the region is facing tough headwinds, several countries are looking to counteract these problems by spearheading capital market reform efforts, which will help accelerate foreign investor inflows even further.
A region bristling with opportunity
East Africa’s economic expansion over the last decade has been facilitated by a combination of political stability; robust infrastructure spending; favourable regulatory environments; and healthy exports. However, the region is expected to suffer a slowdown over the next two years, with Standard Chartered revising down its GDP growth forecasts for several markets. For example, Standard Chartered anticipates that GDP growth1 in Kenya will be at 5.5 per cent in 2022, before falling to 5.0 per cent in 2023. In the case of Tanzania, Standard Chartered expects GDP growth of 4.6 per cent in 2022 and 5.3 per cent in 2023, which is lower than previous estimates.
However, East Africa is also endowed with a youthful population, with a median age of just 18.7 years, suggesting the region will benefit from an enormous demographic dividend, propelled by the strong labour force, its large purchasing power and latent potential for investments.
At the same time, East Africa has an excellent reputation for embracing innovation, which has been made possible by the proliferation of mobile phone technology. For instance, Kenya’s mobile penetration rate currently stands at 109%, which is above average in SSA (Sub-Saharan Africa), and this is expected to grow as previously unconnected people and regions get access to mobile services, including 5G networks.
The ubiquity of mobile phones has empowered large swathes of the once underbanked or unbanked populations of East Africa by giving them access to mobile money services. This financial inclusion is likely to spur investments into pension schemes and collective investment funds moving forward, thereby stimulating growth in the domestic capital markets.
Capital markets continue to deepen
Right now, there are 110 companies listed on the four main stock exchanges in East Africa - namely Nairobi Stock Exchange (home to 62 listed companies); Rwanda Stock Exchange (9); the Dar es Salaam Stock Exchange (21); and Uganda Stock Exchange (18) – and these include several well-known brands such as Safaricom; Vodacom Tanzania; Equity Bank; and Tanzanian Breweries.
Although IPO (initial public offering) activity in East Africa has been slightly flaccid recently, regulators are looking for ways to boost the number of listings in the region. Take Kenya, where the authorities are reportedly assessing whether to allow SPACS (special purpose acquisition companies) – an investment vehicle which raises money through an IPO with funds then being used to purchase a private company – to list on the Nairobi Stock Exchange.
Elsewhere, regional stock exchange consolidation is also being pursued so as to encourage greater cross border listing and trading across the continent, which in turn will deepen liquidity – particularly in some of the more thinly traded or exotic markets.
While past efforts to integrate East (and West) Africa’s stock exchanges have yielded little success, there is greater optimism about the prospects for the Africa Exchanges Linkage Project (AELP). The AELP is an Africa-wide initiative which launched in 2016 with the participation of 7 stock exchanges including the Johannesburg Stock Exchange, the Nairobi Stock Exchange, the Nigerian Stock Exchange, the Egyptian Exchange, the Casablanca Stock Exchange, the Stock Exchange of Mauritius and the BRVM of the eight West African markets. The project aims to support easier cross-border trading, listing and settlement across the participating financial market infrastructures (FMIs). More recently, the Botswana Stock Exchange and Ghana Stock Exchange were added to the list of participating exchanges onto the scheme.
Aside from making it easier for investors in these countries to gain exposure to more than 1000 listed companies in African capital markets, the AELP will also facilitate cross-border trading in government bonds, corporate bonds, exchange traded funds (ETFs) and derivatives. Again, this will simplify trading in the region and potentially accelerate portfolio investment inflows into East Africa.
Market reforms continue to gather momentum
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 a wider gamut of products including ETFs, REITs (real estate investment trusts), derivatives and green bonds, as it looks to attract more foreign investment.
The Capital Markets Authority (CMA), Kenya’s regulator, also gave approval to the Central Depository and Settlement Corporation (CSDC) to offer securities lending and securities borrowing. In addition, Kenya has permitted market participants to engage in short-selling, in what will help ensure proper price discovery and shore up liquidity. In contrast with other major African markets which adopted restrictive FX practices during the pandemic, regulators in Kenya, Tanzania and Uganda have all liberalised their respective FOREX markets, making it easier for foreign investors to repatriate funds offshore.
At a post-trade level, East Africa has implemented a number of positive reforms as well. Kenya’s Central Bank recently installed a SWIFT enabled CSD (central securities depository) system which will support auto-reconciliations of holdings.
Meanwhile, Tanzania is starting to open up the Capital Account to non-residents for investments into government securities, although this is currently limited to East Africa and Southern African Development Community (SADC) markets. Uganda has also made notable improvements. The country is working on ways to use Central Bank funds for settlements, while hybrid annual general meetings are now practiced extensively.
All of these initiatives will be integral in helping East African markets attract investment in the future.
A path to success
While growth projections have dipped, the region’s demographic dividend and widespread adoption by the local population of innovative technologies makes East Africa a very compelling market for investors to participate in. Efforts to augment liquidity through regional stock exchange consolidation, the launch of new trading products and enhancements to post-trade processes are turning the region into an attractive destination for global investors.
This article is based on themes discussed during the Standard Chartered Frontier Day conference.
1 These forecasts reflect a downward revision due to rising inflation in H2. Please refer to Standard Chartered Global Focus – Economic Outlook Q3-2022 Near the tipping point at https://research.sc.com
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