The birth of a new star?

Author:Siddiqi, Moin
 
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After burning their fingers in South East Asia, a number of international investors are now taking cautious peeks at Africa's emerging markets. Moin Siddiqi takes a balanced look at Africa's growing potential.

What is an emerging market? The most commonly accepted definition is offered by The World Bank. Based on GDP per capita income, it identifies an emerging market as one where per capita income falls below $8,626 p/a. In these terms, where can more emerging markets be found than in Africa?

With economic liberalisation spreading across the globe, emerging markets' share of world stock market capitalisation has risen from 3.7% in 1985 to 12.7% in 1996, and is expected to increase substantially over the next decades. Hopefully, Africa will participate significantly in this future growth.

The globalisation of financial markets offers developing countries additional opportunities to increase private investment, modernise technology, raise production, create new jobs, and accelerate economic growth.

Net foreign portfolio investment into the developing world surged from $3.2bn in 1990 to a peak of $45.8bn in 1996, before settling to $32.5bn in 1997. However, this strong current by-passed Africa which attracted only 6% of it. Foreign investors persisted in seeing Africa as a dark continent, beset with high political and economic risk, and were therefore extremely wary of any capital commitment. As experiences in Mexico in 1994 and East Asia in 1997 demonstrated, the gamble involved in seeking the rewards emerging markets offer is very real -- and the African economic landscape seems to abound in risks. Bureaucratic controls, underdeveloped capital markets and unsupportive legal infrastructures repel investment, and seem, in the minds of investors, to outweigh Africa's rich natural resources and general availability of opportunity.

Improvements

African governments now seem to have accepted the need to compete for international commercial risk capital. The region is undergoing major changes in order to become a focal point for international investors. Economic adjustment programmes that combine the twin principles of macroeconomic stability and structural reform are being implemented in most countries. As a result, Africa is decisively opening up to private investors.

Privatisation programmes, which are being pursued from North to southern Africa, bode well for the continued development of the region's stock markets and will be instrumental in attracting inward investment, both portfolio and direct.

In essence, privatisation is emerging as the new source of growth for the fledgeling African stock markets. A large proportion of the more attractive State Owned Enterprises (SOEs), e.g. national airlines, banks, shipping companies, public utilities, and telecorns are rapidly being privatised. African policy makers are also seeking to improve the operation of their capital markers with the assistance of the International Financial Corporation (IFC).

An attractive environment for investment requires markets where trade is safe, transparent, effective and liquid and where valuations are relatively cheap. As the experience of other regions shows, foreign investment always goes to the markets where the rules of the game are reasonably well-defined.

Leader at the pack

International investors, stung by the volatility in SE Asian markets and the consequent steep currency depreciations, have been looking for markets isolated from Asia's turmoils. They have found these in Africa and have diverted some of their portfolio investments to the continent.

A major beneficiary of this has been South Africa which is perceived to be a safehaven investment outlet - thanks to its sophisticated corporate governance and highly regulated banking sector, as well as its low private (external) debt ($19.7bn).

South Africa is the developing world's third largest stock marker, capiralised at $261bn and second only to Hong Kong and Taiwan. It accounts for over 85% of the continent's total market capiralisation. The Johannesburg Stock Exchange (JSE) is among the world's most technologically advanced exchange and represents about 1520% of the value of all emerging markets. South African blue-chips...

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