African Securities Markets Feel the Pinch of Global Linkages
For the last two months, investors at the Nairobi Stock Exchange (NSE) have watched in horror as the market dropped to a three years low. The NSE 20 shares index, which is used to gauge the general performance of the market, dipped to a 4,000 low from about 5,400 in mid July (a 26% decline), a level last seen in 2005. Market analysts have attributed this to among other reasons the financial crisis in the United States of America (USA) that has seen financial giants like AIG, Lehman Brothers and investment bank Bear Stearns go belly up or get bailed out by the US government.
|Electronic Trading at NSE|
Several other African bourses have experienced the same decline, with the Nigeria Stocks Market being the worst. The Nigerian market has seen a six months free fall in share prices that has worsened the liquidity crisis in the country. This has forced the Nigerian federal government to institute harsh measure to curb the crisis.
Apart from factors such as inflation and increased oil prices in the international market, the link between African securities markets and the financial crisis in the US is not quite clear. Could African markets be facing their own crisis? Are the effects of the US crisis more direct than anticipated? It would be prudent to understand the relation between our markets and the developed markets.
Africa has been a closed continent to the rest of the world. Little is said of the vast investment opportunities in the continent that have attracted big fund managers from the developed countries. As they seek to diversify from their saturated developed markets, investment firms such as Morgan Stanley and Goldman Sachs have injected colossal amounts in Africa and even participated in public offers like the recently concluded Safaricom IPO. This can be said to be the most direct linkage African bourses have with the developed markets, especially the US.
Most of the money invested in Africa’s stock markets also comes from Africans in the Diaspora. Many Africans have over the years left their countries to go for ‘greener pastures’ in the developed world. They usually send huge amounts of money to their families and relatives in Africa for personal use and investment. Most of the investment money ends up either in real estates construction or in the stock markets. A clear example is the Nairobi Stocks Exchange where about 30% of the money injected in comes from the Kenyans in Diaspora.
The ongoing US financial crisis which is termed as the worst since the Great Depression of the 1930’s has seen Africans in the diaspora laid off fro their jobs and sources of income reduce. Many Africans in the diaspora do odd jobs to make ends meet and have something to send back home. Such menial jobs have been the first casualties of the US crisis as every sector seeks to down-size and break even during this period. The stream of investment funds from the diaspora has consequently reduced considerably as some of them sell their investments to pro-up their declining incomes. This can be said to be an indirect linkage between African bourses and the developed markets.
Another indirect connection is from the ‘Aid industry’. With the possibility of the US financial crisis turning into a global phenomenon, the amount of aid funds that have been the driving force in most African government budgets are set to dwindle. Humanitarian aid may continue trickling in as development aid reduces to the bare minimum. In the one-day conference on Africa in New York, UN Secretary General Ban Ki-moon issued a plea for US$ 72 billion per year in foreign aid if Africa is to reach any of the Millennium Development Goals (MDGs). Without this funding, the economic outlook of most African countries is bleak and this will definitely affect the continent's securities markets.
African economies as well as other emerging economies around the world have been feeling the effects of the ups and downs of finance in the U.S. and other developed markets. When commodity prices were high, mobile global capital flowed into Africa and pushed asset prices up, making capital cheap and fueling growth. With the opposite cycle in place, a reverse in economic growth for many African countries is expected. That is why Africa should not depend on aid for development.
By Kevin Mwanza
Mr. Mwanza is an African Executive Staff Writer
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