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AfricaJuly 4 2018

West Africa stock market heads regional integration push

The BRVM, the shared stock exchange for the eight West African Economic and Monetary Union states, is the world’s only unified and regionally integrated bourse. Though it faces several challenges it is ideally placed to lead the further integration of Africa’s stock exchanges, as James King discovers.
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BRVM

When Edoh Kossi Amenounve, the chief executive of the Bourse Régionale des Valeurs Mobilières (BRVM), met with London-based investors in May, he was armed with a compelling message. The economies of the eight countries that constitute the West African Economic and Monetary Union (Waemu), and that share the BRVM, have grown at an average rate of 6% in the past five years.

Over the next three years, this figure is expected to increase to 7%. These markets, joined as they are by a common currency, the CFA franc, which is pegged to the euro, the same central bank and the same financial regulator, offer some of the best investment prospects in Africa.

Accessing these opportunities through the BRVM is relatively easy. As the world’s only single, unified, fully integrated regional stock exchange it is both an outlier and a pioneer. And the markets for which it is the common stock exchange – Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo – all benefit from the scale offered by sharing this regional market. “Integration is part of the DNA of the BRVM, to the extent that this exchange is the only example of perfectly integrated exchange in the world,” says Mr Amenounve.

Huge potential 

The BRVM has 45 listed companies and 37 debt securities (which include five sukuk instruments) with a combined debt and equity market capitalisation of about $17.7bn, as of the end of January 2018. This makes it the continent’s sixth largest exchange in terms of market capitalisation. Nevertheless, it covers a region with a total population of 120 million and an economy of about $108bn, meaning that BRVM has substantial opportunities to grow in the coming years.

On this point, Mr Amenounve is bullish. “Africa is still urbanising and much of the economic benefit lies ahead. African economies are also well positioned to benefit from rapidly accelerating technological change that can unlock growth and leapfrog the limitations and costs of physical infrastructure in important areas of economic life,” he says.

But despite this obvious promise, the BRVM, which became operational in September 1998, must overcome several developmental hurdles in order to realise this potential. For one, this will require further efforts to improve the exchange’s infrastructure and operating procedures. But more importantly, greater effort will be required to stimulate liquidity by increasing the breadth and depth of the market.

“The BRVM’s index weight is skewed towards one large stock, Senegal’s Sonatel, which accounts for close to 40% of the total. In addition the vast majority of remaining stocks originate from Côte d’Ivoire, so the index as a whole lacks regional breadth,” says Christine Phillpotts, lead Africa analyst with AllianceBernstein, a global asset management firm.

Liquidity constraints

According to Ms Phillpotts, liquidity constraints are hampering both investment inflows and potential listings at the BRVM. “At present there aren’t enough companies – and companies of scale – that are interested in listing. That doesn’t leave a lot of shares to trade,” she says.

The BRVM’s leadership has, in recent years, been pushing hard to increase the depth of the market. Some success has been achieved as the exchange’s liquidity ratio has increased from 5.46% at the end of 2012 to 21.88% at the end of 2017. In addition, 32 stock splits have been executed with 25 taking place in 2017. A further 10 are expected to occur in 2018, according to the BRVM’s Mr Amenounve. In tandem, a number of recent initiatives have also been unveiled in support of the same objective.

African economies are well positioned to benefit from rapidly accelerating technological change that can leapfrog the limitations and costs of physical infrastructure

Edoh Kossi Amenounve

 “We [enabled] the listing of Islamic bonds [sukuk] on our market in 2016, as well as the opening of a third board in December 2017 dedicated to small and medium-sized enterprises [SMEs]. [This will] permit them to mobilise long-term resources on the capital markets to support their growth. This launch was followed in March 2018 by the start of a capacity building and SME promotion programme called Elite BRVM Lounge,” says Mr Amenounve.

In addition to supporting the development of SMEs in the region, the BRVM is also looking to more immediate listing opportunities. Since 2014, the exchange has raised about $312m through initial public offerings (IPOs), averaging two listings per year. In 2018, the BRVM is expecting a further two IPOs, with one bank and one SME in the pipeline. Over the next three years, the exchange is targeting an average of three listings on the SME board and two listings on the main board every year.

“The BRVM has been discussing the possibility of providing more incentives for private companies to list. Another option is to get formerly government-owned entities to privatise and pursue a listing on the market. These types of actions will eventually provide a baseline of stocks to get investors more active,” says Ms Phillpotts.

London roadshow

Attracting additional foreign investor inflows will also help. Mr Amenounve’s recent visit to London, which formed part of the BRVM’s 2018 Investment Days Roadshow and included stops in Johannesburg and New York, was an effort to mobilise greater interest in the BRVM’s offerings from overseas. And with economic growth across the Waemu region surging, interest from these economic centres is growing.

“On the demand side from a foreign investor perspective, it comes down to investors looking for differentiated exposure and higher risk-adjusted return in frontier markets. BRVM does provide interesting opportunities for access to frontier markets,” says Ms Phillpotts.

But as Ms Phillpotts indicates, real and lasting change to the exchange’s liquidity profile can also be stimulated by changes at the domestic level. Here, she points to a growing wave of regulatory reform to Africa’s pension funds and the potential for this to boost liquidity on the BRVM.

“Beyond foreign investors, in many African markets work is under way to implement pension fund reforms. There is a lot of focus on institutionally managed domestic pension funds and this could lead to more dynamic local investing in the stock exchange. Over time this should help to boost liquidity,” she says.

These challenges, and others, will take time to address. Though the BRVM is working hard to add more maturity to its liquidity profile, it will take a mix of regulatory reform, marketing efforts and economic developments in its constituent markets to accelerate this agenda in the coming years. For now, however, the feeling is that the exchange is heading in the right direction. 

African links

Beyond its liquidity challenges, the BRVM is serving as a model for the integration of stock markets across the region and beyond. As the only unified, regionally integrated exchange in the world, it offers an example of the kind of efficiencies and scale that can be gained (particularly by smaller jurisdictions) when resources are pooled into a single stock market.

While the BRVM’s journey has been made easier by the fact that its constituent markets are members of the same currency union and economic bloc, and share common cultural and linguistic traits, efforts are under way to achieve closer integration of the wider west Africa region’s capital markets.

“The BRVM intends to accelerate the process of integration of stock exchanges in Africa, which is for us an imperative necessity to support the economic development of our continent. To this end, we have a project that is quite advanced in its conceptual phase at Economic Community of West African States (a regional economic union of 15 countries) level. It will certainly provide companies in our region with a common trading platform, and a deeper, broader, liquid market able to attract investors from all regions of the world,” says Mr Amenounve.

This agenda makes more sense for some west African countries than others, depending on their size. Moreover, national pride has long been an obstacle to the integration and alignment of stock exchanges across the continent. But the relative success of the BRVM means that it is ideally placed to play a leading role in integrating the continent’s fragmented capital markets in the coming years. 

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