Making capital markets work in emerging and frontier - ACCA

24 Pages·2012·0.89 MB·English

ACCOUNTANTS FOR BUSINESS
Making capital markets work in
emerging and frontier economies:
case studies
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Making capital markets work in emerging
and frontier economies: case studies
Foreword
Capital markets promote economic development and growth by allowing firms
to tap large, international pools of savings to obtain the finance they need. In
order to do so in a sustainable fashion they rely on institutions that ensure
reliable financial reporting and assurance; those in turn depend on the skills
and competence of professional accountants.
The relationship runs both ways. Nearly half of ACCA’s members in emerging
and frontier economies work in regional or global financial centres; their
careers are linked either directly or indirectly to the fortunes of capital
markets. It is no secret by now that these economies will dominate global
economic growth in the future, but whether they will have access to adequate
finance to fulfil their potential is by no means guaranteed.
ACCA believes that the important global debates on corporate governance,
financial disclosure, and financial regulation cannot remain focused primarily
on capital markets that have already achieved critical mass and whose
success is beyond dispute; nor can they reflect forever the economic league
tables of the past.
Therefore, we aim to bring policymakers, regulators, exchange operators and
corporate decision-makers from the most dynamic emerging economies
together on a regional basis in order to determine what lessons can be learned
and shared from their successes and failures, why some markets succeed
where others fail and what the profession can do to support financial
development in the public interest.
We are pleased to present, in this report, a selection of highlights from the
development of fledgling capital markets. Along with our discussion paper,
The Rise of Capital Markets in Emerging and Frontier Economies, we hope they will
provide all stakeholders with food for thought and help kick-start a much-
needed global debate.
Helen Brand
Chief executive, ACCA
MAKING CAPITAL MARKETS WORK IN EMERGING AND FRONTIER ECONOMIES: CASE STUDIES 1
Introduction
Since the global economic downturn shareholders’ need for a level playing • exchanges, regulators and
began in 2008, it has been clear that field. The implications for governance governments think on a global
the world must look to the emerging frameworks, independent board basis and learn the lessons from
economies of Africa, Asia and Latin representation and transparency of successes and failures in
America for growth. Despite a decision-making are substantial and neighbouring countries as well as
multitude of challenges, these must be managed in the interests of other regions.
regions have not only led the firms, investors and wider
recovery, but are also increasingly stakeholders. Getting the basics right is not enough
claiming a greater role for themselves for very long. Developing capital
in global economic governance. For the finance function, this implies markets require increasingly
a wholesale transformation, as it transparent governance and ethical
A diverse set of businesses are at the repositions itself to play a more business conduct to encourage
heart of this success story: from central role in governance, risk and investor confidence. As businesses
regional corporate champions with compliance alongside the more and governments in the emerging
aspirations of rapid growth beyond traditional functions of financial markets align themselves to the goal
their domestic economies, to state- reporting and management of sustainable growth, environmental,
owned enterprises trying to reach accounting. Finance becomes the social and governance reporting is
more of the people they were created heart of an externally-focused likely to become part of a broadening
to serve, and with better services. organisation with the aim of landscape of disclosure.
maintaining investor confidence and
Going forward, such businesses will delivering shareholder value – and Of course, what appears to be
need to be able to finance themselves thus it needs to be able to measure common sense on paper can be a
more efficiently, and from multiple and provide assurance on what difficult process that takes many
sources, as they continue to outgrow shareholders value. years in the real world. Building
the narrow savings bases of their political consensus, human capital
home countries and their still- How, then, can we get capital and trust in market institutions is a
developing banking systems. Without markets to work for emerging and gradual and painstaking process, and
more cost-effective and diverse frontier economies? ACCA examined one that is unique to each country. It
sources of finance, not only will this question in the discussion paper, is therefore hard to relate to the
emerging and frontier economies The Rise of Capital Markets in Emerging challenges faced by policymakers
grow more slowly than they could, and Frontier Economies. Making and other market participants on the
they will also become increasingly capital markets work means ensuring ground without hearing their voices
vulnerable to a new global banking that: first-hand. The present report
crisis. And without access to the acknowledges this fact and uses a
excellent investment opportunities • standards of reporting and small number of focused case studies
available in these countries, savers assurance are strong enough to in order to get to the bottom of key
and investors both locally and inspire confidence episodes in the development of
globally will be denied some of the emerging and frontier markets during
best opportunities the world has to • market participants understand the last decade. The stories
offer. the risks they are taking and their recounted here are told first-hand, in
responsibilities to one another as much detail as practical.
Broadening participation in the and yet believe these to be
ownership of companies is a good justified by the returns available One thing can be said with certainty,
example of the complex objectives regardless of how the facts are
pursued by emerging capital • capital market activity is self- approached. The accountancy
markets. At both the management sustaining; markets are liquid and profession is instrumental to capital
and policy levels, there is a need to don’t rely too much on ‘hot market development and without its
ensure responsiveness to the diverse money’ that can evaporate support capital market development
needs of investors, including minority overnight can be stunted or unbalanced. As the
2
preparers, users or auditors of World Bank or the UN Conference for
financial reports, they have an Trade and Development (UNCTAD), to
interest in upholding confidence in establish and pursue a shared vision
the rules and educate firms and for economic development as whole.
investors where appropriate. In In fact, ACCA’s series of publications
return, they can count on healthy on capital markets in emerging and
capital markets to attract more frontier economies forms part of the
business and potential employers to response to the issues raised by
their countries and generate new Intergovernmental Working Group of
career opportunities for them. Finally, Experts on International Standards of
the accountancy profession is just as Accounting and Reporting (ISAR) at
global as the capital markets the 13th UNCTAD session in Doha,
themselves; it is an established Qatar.
network well suited to the task of
transferring good practice around the ACCOUNTANTS FOR BUSINESS IN
world. AFRICA: SUPPORTING GROWTH,
SHAPING THE FUTURE
As the most global of the professional
accountancy bodies, ACCA feels this ACCA will continue to facilitate the
responsibility most acutely. Nearly regional and global debates on
half (48%) of the ACCA membership capital market development. ACCA’s
in non-OECD countries work in 2012 Council meeting in Nairobi,
regional or global financial centres Kenya, has provided an excellent
and their fortunes are linked to those focus for this effort, tapping into a
of capital markets, some of them in rising awareness of Africa’s
positions of authority that actively enormous potential for growth as well
shape their development. Through as African nations’ commitment to
ACCA they have access to an further economic integration. The
unparalleled network of local know- prospects for the entire continent
how that can guide the development have rarely been more promising; the
and integration of capital markets profession, working in the public
and promote their healthy function. interest, will play its part in making
them a reality.
Capacity building is a natural
function for such a network, and an
essential component of capital
market development. At the national
level, ACCA works with regulators and
market institutions to develop the
human and social capital that
markets rely on – including the well
rounded professionals that help
companies create shareholder value
and face public scrutiny with
confidence.
At the global level, ACCA partners
with mission-driven organisations of
equally global scope, such as the
MAKING CAPITAL MARKETS WORK IN EMERGING AND FRONTIER ECONOMIES: CASE STUDIES 3
1. Connecting Africa’s stock markets, one step at a time
SPEAKING WITH ONE VOICE • to make the securities markets of
SADC exchanges more attractive
Beatrice Nkanza (pictured right) is to both regional and international
the CEO of the Lusaka Stock investors – among other things, by
Exchange and is the chair of the increasing market liquidity and
Committee of the Southern African enhancing trading in various
Development Community (SADC) securities and financial
Stock Exchanges (CoSSE). instruments
CoSSE, Mrs Nkanza explains, arose • to promote the development of
from the interaction between SADC efficient, fair and transparent
member states at the political level securities markets within the
– it is in many ways an embodiment SADC region, and encourage
of their long-term goal of integrating interaction among market
the economies of the region. CoSSE participants
is one of the Committees of the SADC
– the others being the Committee for • to encourage cross-border trading
Central Bank Governors (CCBG) and and listings, as well as the
the Committee of Insurance, exchange of intellectual capital
Securities and Non-Banking and technical expertise among the Beatrice Nkanza is the CEO of the Lusaka Stock
Associations (CISNA), to which member countries, and to Exchange and is the chair of the Committee of
CoSSE reports. CCBG and CISNA maximise their cooperation. the Southern African Development Community
(SADC) Stock Exchanges (CoSSE).
themselves report into the
Committee of Senior Treasury THE STATE OF INTEGRATION
Officials who in turn report to the
Council of Ministers. In this way, CoSSE’s primary mandate, Mrs and depository side has proved more
although the CoSSE is deemed a Nkanza explains, is to pursue challenging.
private sector association, its agenda initiatives that drive visibility and
is communicated to the SADC foster growth for the benefit of all its Robust cross-border trading between
Ministers, representing the common members. The most immediate ways the region’s stock exchanges is not
interest of their capital markets. of achieving this are through yet the norm: although the obstacles
enhanced cross-border trading and are many and varied, issues related
Established around 1997, CoSSE listings, which can be achieved to clearing and settlement are
counts among its members the without the cost of automation or probably the most important. An
exchanges of Botswana, Malawi, other complicated initiatives. As a even more fundamental obstacle is
Mauritius, Mozambique, Namibia, result, there are currently enough the fact that Africa’s smallest
South Africa, Swaziland, Tanzania, incentives to drive market exchanges are for the most part not
Zambia and Zimbabwe. Some of its development by this method. On the automated and are under-resourced.
objectives are: other hand, harmonising regulation
(ie listing rules) and to some extent Automation is a very substantial
• to improve the operational, the use of technology are the two investment and while national
regulatory and technical areas in which CoSSE is most active. governments are working towards
underpinnings and capabilities of It has achieved much on the funding this, it is simply not available
SADC exchanges and encourage regulatory side – its work on the in all the exchanges. Additionally,
the development of a harmonised harmonisation of listing rules among differences in the regulatory
securities market environment to the region’s exchanges, for instance, arrangements can often make a
facilitate trading, clearance and is counted as a success – while difference. For instance, in countries
settlement within the SADC region adoption of technology in the trading such as Malawi, Lesotho or
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Mozambique, trading in securities is In so doing, Mrs Nkanza explains, produced and begun to implement its
regulated by Central Banks rather CoSSE is also mindful of its own plan for integrating the national
than by a regulator specialising in remit: payments systems. On the other
securities, such as a Securities and hand, CISNA has yet to establish a
Exchange Commission (SEC). CoSSE We don’t have the mandate to regional securities settlement
does not, however, see this as an dictate that our members give up procedure. A group of custody
obstacle; instead, it believes SADC independence to a focal point. Until experts have been established as a
member states must be given time to they decide otherwise, the answer is subcommittee of CoSSE precisely to
come round to this way of operating to deal with each exchange examine ways of dealing with this
(or not) as their domestic capital independently at a level which they matter.
markets mature. can manage, and encourage them
to deal with each other on a peer-to- BACK TO BASICS
SPOKES COME OFF THE HUB MODEL peer basis. You must remember, the
market still dictates what is to be CoSSE provides the SADC states with
Until as recently as 2009/10, a done; if the market conditions are a forum where they can benchmark
hub-and-spoke model in which trades such that they require a different their levels of capital market
would be managed centrally was the approach, members will have a development, and through which
favoured mode of integration for reason to reconsider. ministers can share important
facilitating trading in the member insights. On a more personal level,
exchanges. Yet the settlement side, ie The exercise made us stand back Mrs Nkanza points out that CoSSE’s
the matter of a central depository, and look at the underlying most valuable contribution to date
has not been tackled yet and is still a architecture required for the may have been to establish a platform
long way away. objectives to be achieved; is there of common practice among Africa’s
an agreed template that can be used exchange operators and regulators.
Consequently CoSSE put a great deal for clearing, settlement, custody? As Because the continent’s exchanges
of resource into examining the ‘hub we speak, the answer to that is ‘No’. differ greatly from each other in both
and spoke’ approach; what it This made us look at other elements maturity and sophistication, there is
discovered, however, made it clear of the market infrastructure – a great deal of experience that more
that this would take a long time. More clearing and settlement procedures, established exchanges such as JSE or
importantly, the weaknesses for instance, which are required for Nairobi can share with younger or
encountered in the integration of automated trading. less developed markets. Until the
payments and settlements prompted establishment of CoSSE such access
more research into the more With that realisation, CoSSE moved and interaction would have been
fundamental requirements of market the focus of its attention to more difficult, but now senior staff at
integration. cross-cutting market infrastructure exchanges as well as operators can
issues, in the hope that when the literally call their counterparts and
While support for the hub model is technology for automation is discuss issues directly.
not dead, CoSSE is now aligned with available across the continent, the
the idea of a peer-to-peer model in underlying systems will be in place to Because of the many obstacles on
which individual exchanges manage accommodate it. the way towards integration and the
interoperability on a bilateral basis. limitations of its remit, CoSSE has
Mrs Nkanza puts it this way: ‘In order Mrs Nkanza believes that member sometimes been the target of
not to stop the train from leaving the states have taken a keen interest in criticism, even from within, for being
station altogether, those exchanges resolving issues around the insufficiently action-oriented; Mrs
that are able to may still go ahead’. processing of payments, which is Nkanza is keen that this criticism is
after all cardinal to the development taken to heart without driving the
of their domestic financial industries. Committee to either confrontation or
In fact, the CCBG has already inaction.
MAKING CAPITAL MARKETS WORK IN EMERGING AND FRONTIER ECONOMIES: CASE STUDIES 5
It is true, there was often a feeling in within the control and resources of THE PARALLEL LIVES OF REGIONAL
the last six years that I have been CoSSE?’ EXCHANGES NETWORKS
part of CoSSE that it was difficult to
see the agenda clearly – we had a Following this logic still leaves CoSSE CoSSE’s multi-speed, peer-to-peer
very general agenda intention of with plenty to do over the next few approach is not unique among
working together to achieve more years, focused mostly on capacity integrating economic regions.
listings for e.g., without specifying building and encouraging cross- Operators in the Caribbean have also
how this was going to be achieved. listings. Investor education is one reconciled themselves to a similar
The ‘what’ was clear, the ‘how’ not priority that CoSSE sessions have model of integration: Jamaica,
so much. There was a lot of addressed – the point is to learn from Barbados, and Trinidad and Tobago,
introspection – what are we one another in order to see how for instance, are the founding
supposed to be doing within the exchange operators can best engage members of the Caribbean
context of our mission? We needed participants in their local markets Exchanges Network (CXN), launched
to ask those questions. Some and explain to them the role of the in late 2011, which allows investors in
members, for instance, believed stock exchange. The Johannesburg all three territories to buy and sell
that CoSSE needed to become a Stock Exchange (JSE) has assumed a equities directly, instead of going
fully fledged committee of the natural role as coordinator, reflecting through a home territory broker, as
SADC, in the hope that this would its more advanced stage of well as settling transactions through
give it the power to champion more development and expertise. a bank of their choice. Like CoSSE,
market-moving policies. Soon the original plan for CXN was to
enough we realised we could move CoSSE has also focused its efforts on pursue a hub model: a regional
only so much given the reasons I enhancing visibility. A new website settlement bank was originally
have highlighted. has been set up to provide investors envisaged but never materialised.
with information on listings and other
Around 2010, CoSSE addressed this exchanges’ information and has Could developments in the Caribbean
by drawing up its first Strategic Plan. ample scope to grow into a richer illuminate regional integration in
The latest progress report (April resource. ‘Without information’, Mrs Africa? CXN comes complete with a
2012) shows that many of the Nkanza explains, ‘you cannot make regional regulatory framework
activities under the Plan have been even bad decisions.’ governing the activities of Caribbean
shortlisted, and delegation is now in brokers, who must register with the
place, while a new Strategic Plan has Nor are more far-reaching projects authorities at each of the markets in
been drawn up for 2012–16. Delivery out of the question, but for all other which they intend to do business.
is contingent on national markets things CoSSE will need to build on its Listings are home listings first, and
maturing in time to allow for the next existing programme of work before subject to domestic rules and
stages in its development, but its remit can be effectively widened. incentives, but brokers are mobile. A
progress is encouraging. For now, however, shared objectives Memorandum of Understanding
keep CoSSE members focused on between domestic regulators ensures
The overriding logic of the Strategic their mission. that they will support each other’s
Plan is to maintain a tight focus on supervisory and enforcement efforts.
CoSSE’s actual remit and, more We have one objective in mind – to Registration processes are relatively
importantly, those issues that are achieve growth. We are no different seamless for those with good
cross cutting. Mrs Nkanza explains [from other exchanges]. We’re looking standing at home.
the process of selecting initiatives for for more listings. We’re still grappling
CoSSE to pursue as follows: ‘Is it with information dissemination, still The Caribbean experience also
measurable? Is it cross-cutting, in trying to demonstrate to people that demonstrates how gradual the
that it benefits all members? Is it exchanges are there for their benefit. process can be. More than 20 years
6
on from the first cross-border listings
and trades, integration ‘still isn’t MAKING IT WORK: MAINTAINING THE MOMENTUM TOWARDS REGIONAL
where we want it to be’, in the words MARKET INTEGRATION
of Waine Iton, CEO of the Trinidad
and Tobago Stock Exchange (TTSE).  Models relying on a central regional hub are attractive but often
impractical. Regional integration is more likely to succeed on a peer-to-
We still have three discrete order peer, multi-speed basis, where exchanges are invited to join networks of
books, for instance, and only eight or collaborating operators as soon as the right systems are in place.
nine companies on the TTSE are
cross-listed. It has been quite a  It is easy to overlook the importance of domestic payments, clearing
struggle, but the logic is compelling: and settlement arrangements when plotting ambitious IT-based
we really don’t have the throughput solutions for integration. In reality, however, while the implementation
to support five–six mini exchanges in of such systems is only a matter of resources once the more
the region, which is where we are; we fundamental aspects of trades have been harmonised, it is impossible
duplicate tasks. if they haven’t been harmonised.
It is hard to tell how long it will take  Automation of exchanges is absolutely fundamental, but requires very
to reach the originally intended substantial resources. Governments must prioritise this and seek
degree of integration, as Mr Iton assistance where appropriate.
freely admits. It could easily be
another 20 years, or it could be much  Regional exchanges networks work best if given a clear remit to which
sooner. they adhere tightly. It is important to arrive at concrete action plans
focused on the network’s unique remit as soon as possible, and to
monitor their implementation regularly.
 The social aspect of exchanges networks is paramount to their role. It
is much easier to share best practices if senior officials are in regular
personal contact and can offer their expertise and resources to one
another. This is easier to achieve in smaller regions such as the
Caribbean than in much larger areas such as Africa.
 Exchanges networks around the world face remarkably similar
challenges in the pursuit of regional integration. They have a lot to
learn from each other but ties between them need to be strengthened.
MAKING CAPITAL MARKETS WORK IN EMERGING AND FRONTIER ECONOMIES: CASE STUDIES 7
2. Financial reporting squared: educating financial journalists in east
Africa
For Uganda’s Capital Markets public, something that would
Authority (CMA), making sure the otherwise require an enormous
public understands the role and mobilisation of resources on the part
function of markets is a statutory of the government.
duty, part of its mandate to promote
financial development. The In evaluating its campaign, the CMA
government of Uganda hopes to soon decided that it was impossible
mobilise private investment and to educate journalists on how to
pension money to boost the liquidity report on capital markets without
of Uganda’s stock market while also reference to the financial statements
offering individuals the opportunity to of listed firms and the way in which
earn higher returns, but the CMA also they are prepared. Since this usually
knows that without appropriate meant bringing in accountants to
education citizens could be exposed discuss how financial statements are
to risks they do not understand. prepared, the CMA went straight to
Since the initial public offering (IPO) the source, signing a Memorandum
of Stanbic Bank in 2007 attracted a of Understanding (MoU) with ACCA in
large number of retail investors into 2008 that launched a joint education
the stock market, policymakers have programme in financial journalism.
been wary of the exuberance that This collaboration relied substantially
Ms Ann K. Muhangi, Public Education Manager
well-performing stocks can create on, and further strengthened, the two at the CMA.
and the losses that could accrue to organisations’ existing relationship.
careless investors.
The two signatories promised that basis of the MoU and monitor these
In this understanding, the CMA has each would do its part in sourcing through either quarterly or monthly
maintained a public education expert presenters for the financial meetings as required.
campaign since its foundation and its journalism education programme and
focus is on the most basic that they would recruit a Technical A small group of Programme
information – fundamental concepts Advisory Committee of 10 experts Champions, including mainly editors
such as saving and investment need from across the whole of the financial but also financial experts, were
to come before anything else. This services sector, who would support brought on board to monitor news
has involved reaching out to schools curriculum development, help assess coverage by participants, pointing
and universities in partnership with skills gaps, and act as mentors for out evidence of improvement but also
the British Council and establishing the participants themselves. ACCA of lingering or emerging gaps. The
financial literacy curricula and and the CMA also agreed to provide Champions were chosen for their
investment clubs. It has also support in kind for individual events ability to engage others in the
extended into the workplace, with an on a rotating basis, ensuring a 50/50 industry and for their personal
‘office-to-office’ initiative, and into split of resources committed and impact, ensuring that the programme
the public sphere with the co-sponsorship of the annual CMA reached many of those journalists not
establishment in 2003 of the financial reporting awards. The CMA, nominally associated with it. The
Kikonyogo Capital Market Awards for which had previously awarded a prize programme also achieved a
public financial education. For Ms only for ‘best public educator’ in this wholesale endorsement by one
Ann K. Muhangi, Public Education area, now committed alongside ACCA publication, the Monitor, which made
Manager at the CMA (pictured right), to honour the country’s best financial an explicit commitment to providing
financial journalism is crucial to the journalist with an award each year. more and better coverage of financial
CMA’s cause of improving financial stories and continues to adhere to
competences in the general This joint work was carried out by a this.
population. A well-informed press, small coordination team of no more
she says, can help popularise key than four; their job was to agree In practice, it was not very difficult to
concepts and educate the wider annual activity programmes on the spot likely candidates in Uganda’s
8