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INTERNATIONAL NETWORK |
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| June 2006 - North African Capital markets - Interview with Koceila Maames, Senior Economist, Calyon |
At two seminars held in Morocco in February and March 2006, Koceila Maames, Senior Economist at Calyon, reviewed the specific features of capital markets in North Africa (Tunisia, Morocco, Libya, Algeria and Egypt). Organised by the Institut de Finance Internationale and the Autorité de Régulation des Marchés Financiers du Maroc (the Moroccan regulator), these meetings attracted over a hundred participants from the world of finance, and provided an opportunity to improve the image of these markets at both a regional and international level.
Small and relatively modest, these local financial markets have all the features of emerging markets. Having successfully come through a period of economic liberalisation that began in the 1990s, these countries now face a major new challenge: developing capital markets to help strengthen national economies and provide the substantial investment that is needed.
 Emerging financial markets
Development of capital markets offers rich rewards
On the road to reform
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 Emerging financial markets
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Koceila Maames, Africa & Middle East Senior Economist, Calyon |
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The first thing to note is that
the financial markets of North Africa are still relatively underdeveloped, with the financing of the economy being skewed towards the banking sector. |
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African financial markets are worth a total of USD 981bn (the sum of the stock market capitalisations, debt securities and bank assets), a figure dwarfed by the USD 11,163bn figure for Asian emerging markets (Source IMF / Calyon CMR). In general terms, equity and bond markets lack depth, and indeed are virtually non-existent in some countries.
In equities, the Egyptian and Moroccan markets stand out with sizeable markets and strong capitalisations (over 50% of GDP in both cases). Egypt boasts more than 700 listed companies and over the last three years has seen a very lively run-up in its equity indices (gaining as much as 155% in 2005). Neither of these countries place any significant restrictions on foreigners seeking to invest in their equity markets and many privatisations have been carried out through IPOs. As a result, both countries have equity markets with features similar to those of developed markets. However, both markets continue to suffer from a lack of depth and/or liquidity. In addition to the concentration of the market in particular sectors and the continued high level of family ownership, turnover ratios remain fairly low (16% in Morocco in 2005, compared to 42% in South Africa and 210% in South Korea). Meanwhile other North African countries lag still further behind: the Algerian equity market is embryonic, with only three (partially) listed public companies; and Libya has no stock market.
Bond markets have seen spectacular expansion, particularly in Egypt and Morocco. Bond issues on the Egyptian market have increased by an average of nearly 20% per year since 1995, whilst the figure for Morocco is 26%. These markets are attracting growing interest from foreign investors and 20-year issues are becoming more common. Algeria has also seen growth in corporate issues, with the first bond issue by a private group coming in January 2006. However, the scope of these markets remains limited: the majority of issues are at the short end of the yield curve (82% of Egyptian issues are one-year treasury bills), and markets are dominated by the public sector (Moroccan treasury notes account for 97% of the country's outstanding debt securities)
(Source: Moroccan Central Bank, Egyptian Central Bank and Calyon CMR)
Development of capital markets offers rich rewards | |
Development of local capital markets is essential for these countries as a means of providing a source of financing that gives an alternative to bank finance. This will help avoid the 'eviction' effect seen in some countries where the bulk of available financing is taken up by the government, to the detriment of the private sector. The development of local markets is also a means of ensuring independence as foreign investors arrive.
This challenge is all the more important in these countries because of their substantial need for investment. After several years of strong demographic growth, Morocco's and Egypt's development indicators (literacy, poverty, etc.) are unsatisfactory and both countries will have to raise substantial funds to invest in public infrastructure. Algeria and Libya have put in place ambitious development plans; the Algerian plan is worth USD 80bn over five years, or nearly 100% of GDP. The banking sector can not meet these requirements on its own. The development of capital markets will therefore be crucial to ensuring the financing of these investments and preventing renewed pressure on the restored solvency of these countries, many of which are dependent on a single export (hydrocarbons in the case of Algeria and Libya for instance).
On the road to reform | |
Development of financial markets requires multi-dimensional reforms affecting all areas of the financial sector (equity and bond markets, regulatory bodies, financial instruments, banks and so on).
According to Koceila Maames, banking sector reform is a key preliminary step to the development of capital markets. Each country needs to deal with the specific structures of its banking industries, which have been formed by its political and economic history. In Algeria and Libya, the banking system is up to 90% state-owned, and their governments have played a major part in public sector financing (non-performing loans represent up to 30% of the total loan portfolios in these countries). In Morocco and Tunisia, by contrast, this role has largely been the responsibility of development banks, which, incidentally, now house the bulk of non-performing loans.
Banking reform must be backed by a strict regulatory framework, particularly as far as lending controls are concerned, so as to avoid the risk of an equity bubble in which equity markets are driven upwards by strong growth in lending to the private sector (as has been the case in the Gulf states, where equity rallies have been driven both by the recycling of petrodollars and by the use of bank lending for speculative investment).
By following International Monetary Fund recommendations, North African countries have sent out encouraging signals. In addition to giving central banks enhanced regulatory control and tightening up lending procedures (in Tunisia and Morocco), countries like Algeria and Libya have stepped up the pace of reform and increasingly opened their banking markets to foreign companies.
To ensure successful development of their capital markets, countries will also need to adjust their economic policies. Experience in various emerging markets has shown that at a certain stage, a little further down the line, development of local capital markets always depends on the liberalisation of the balance of capital (free circulation of direct and indirect foreign investment flows). However, free movement of capital will require that governments give up either fixed foreign exchange rates or independence in monetary policy (See Mundell's work in this area, notably regarding "The Impossible Trinity".) This choice is not without its economic consequences: foregoing an independent monetary policy reduces the ability to implement banking sector reform through the use of interest rates for instance, whilst giving up a currency peg brings the risk of inflation.
Everything suggests that Morocco and Tunisia will take the latter course. Both countries have already begun preparations for reduced control over exchange rates, to be accompanied in all likelihood by a monetary policy framework with a direct inflation target (as in South Africa or the Euro zone, with which Tunisia and Morocco will enter into free trade zone agreements in 2008 and 2012 respectively).
The final condition for the development of capital markets is that countries obtain more and also better credit ratings, particularly for their companies: only Tunisia has an investment grade rating, whilst Algeria and Libya are not yet rated by any of the international agencies.
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