Market Illiquidity: Experts advocate diversifying investment options through global best practices

Charles Abuede

International capital market experts have asserted that the diversification of available investment options through the deliberate adoption of international best market practices can help improve liquidity in the debt capital market in Africa as well as developing the market in the bid to overcome the challenges experienced in the course of improving liquidity.

This was part of the outcome of a roundtable webinar discussion organised by the International Capital Market Association (ICMA) to look at recent developments in the African debt capital markets, how they are faring in the pandemic and their prospects for providing financing in the future. It had the theme, “Debt Capital Markets in Africa- Developments and Challenges”. 

The virtual event monitored by Business A.M. saw the gathering of a panel of market experts from across the continent of Africa who shared insights on market performance, liquidity, sustainability and the regulatory environment, as well as the role of central banks in further developing bond markets.

Speaking at the virtual event, Jumoke Olaniyan, vice president, market architecture at FMDQ Securities Exchange, said there has been a mixed performance as a result of yields drop and also the withdrawals of investors and flight of portfolio investments on the short end of the curve. According to her, “Lack of liquidity in the secondary market is one of the major challenges in the market; but the introduction of technology into the market, though with limitations, has helped to rally activities within the short term.”

Jumoke also revealed that the diversification of investment options through adopting international best practices can help improve capital market liquidity. To deepen liquidity in the market, she said, there is need for:

• A robust regulatory framework to support an enabling market structure
• Strengthening corporate governance to help mitigate waning sentiments of investors
• Access to the capital market and development in key markets are paramount to deepening liquidity
• Continue to encourage local investors participation to give foreign investors higher confidence
• Diversify investment options through adopting international best practices.

In his words, “This means a substantial outflow is difficult for the government to raise capital. The situation is prevalent in economies and emerging markets. In South Africa’s market, which is the most liquid debt capital market in Africa, there was an experience of dislocation which lead to slow bond purchases in the government bond and money market. Though, measures put in place by central banks across the world have helped to stabilize the market and intermediate.”

Other panellists at the virtual symposium shared the same sentiments with Jumoke. Chandi Mwenebungu, director and treasurer, African Export-Import Bank (Afreximbank), while speaking on how the development bank can help foster capital market growth, said: “From a development perspective, we work on the entire continent and focused on low countries in the funding and also accommodate low countries while contributing to the funding of the local capital markets.

On helping to foster the market, Mwenebungu said there are plans in the pipeline to help contribute to the development and growth of these countries’ local currency debt market. “We see the AfDB, the Afreximbank and other institutions joining forces to foster the growth of the capital market.”

 In his view, few elements are crucial to the development of the local currency debt market such as credit, enhancements to make the capital market creditworthy and also expand credit rating elements for the markets.

Philip Buyskes, chief executive officer at Frontclear, said there is a plan underway for the implementation of regulatory reforms to help the proper functioning of the market.

“Progress has been made in the last couple of years in the government bond market. But there is still low liquidity in the African secondary market. Overall, it is still a relatively small and illiquid market. Interesting to highlight is the focus of the money market in Africa. We now look forward to seeing more liquidity in the bond and repo market. We are also working on implementing regulatory reforms to help the proper functioning of the bodies or players in the market. Ultimately, our goal is to finance infrastructure. The view is to get the basic things right and being able to achieve real payments in the market.”

While Ekow Afedzie, managing director of the Ghana Stock Exchange (GSE), said there is more impact of the coronavirus pandemic on equity than the bond market, which has brought a shift on the market performance.

According to Afedzie, “there has been a shift in the performance of the local equities market in this part of Africa as a result of the pandemic. We have a unique bond market in Ghana. It is largely over the counter (OTC) and we will keep it that way to buy in more flexibility. In the Ghanaian capital market, we have 145 instruments, a market capitalisation of $25 billion and trades of about $12 billion and more corporate bonds. However, the market is growing fast and getting more liquid. We are on the route to introduce the repo soon.”