Business
Harnessing stock exchanges in Africa to promote growth
Traders on the floor of the Nairobi Stock Exchange
Days before Facebook became a public company on 18 May, the hype behind the social network giant went into overdrive. The media proclaimed it the biggest ever stock market flotation by an Internet company. Investors salivated over a rare chance to make quick profits. The 900 million plus fans who had turned Facebook into a global giant wondered publicly what was in it for them. For a while, it wasn’t just seasoned investors eyeing the stock; even the public showed momentary interest.
In the event, Facebook’s crowning achievement as a public company was an anticlimax, and even almost turned into a disaster. Yet the flotation showed the twin power of stock markets: an ability to raise capital for business expansion (a massive US$16 billion for Facebook), along with a potential to destabilize economies.
With African stock exchanges becoming important sources of investment capital for large corporations, Facebook’s experience has revived debate on whether exchanges are capable of promoting economic growth. Suspicions over their weaknesses are not without basis. The absence of laws regulating trading in derivatives was largely blamed for the 2007 global financial crisis. If such practices could happen on the world’s biggest exchanges, critics ask, how can Africa’s fragile economies withstand the whims of markets?
Positive Outlook
As European economies struggle with a debt crisis and sluggish growth expected in the US and elsewhere, investors are eyeing Africa as the next frontier, thanks to a surging economy and positive growth estimates over the next few years. Indeed, Africa “could be on the brink of an economic take-off, much like China was 30 years ago, and India 20 years ago,” says the World Bank.
This year, sub-Saharan Africa’s economy is forecast to expand by 5.9 per cent, ahead of North Africa’s growth of 4.2 per cent, according to the International Monetary Fund (IMF). Seven African countries are expected to be among the 10 fastest-growing economies in the world for the period 2011-2015. Perceptions of Africa among investors “are becoming more distinctly positive over the long-term horizon,” says Ernst & Young, a global business consultancy company, in its 2011 Africa Attractiveness Survey, with capital investments there set to reach US$150 billion by 2015.
Given Africa’s growth prospects, the challenge for investors is to identify the best avenue for entering the market. Stock exchanges hold some advantages over, say, private equity (see Private equity: new cash for expanding businesses) in raising investment capital: Companies can raise large sums of money to expand operations without getting expensive bank loans, listed firms are required to publish regular reports and stock exchanges give individuals a chance to invest directly in large corporations.
(More: Africa: Private Equity – New Cash for Expanding Businesses)
