REGIONAL INTEGRATION OF THE CAPITAL MARKETS AND

REGULATION OF CROSS BORDER INVESTMENTS-East Africa’s Experience

Presented at the Regional Workshop on Non-Bank Financial Institutions

in Africa

Mauritius 9 – 11 November 2003

by

Japheth Katto Chief Executive Officer

Capital Markets Authority, Uganda

Presentation Outline

Introduction- Benefits of integration- History of cooperation

The East African currency board The (first) East African

Community The collapse of the EAC Revival of the East African

Community EAC convergence criteria Progressive performance The journey towards capital

markets integration EASRA’s and CMDC’s mandates Snapshot of the regional market Progress on market integration Other regional initiatives BVRM,

CISNA, ASEA Challenges and stumbling blocks Conclusion References

Introduction

“There is a strong view among various observers and stakeholders that effort should be made to promote an integrated regional capital market given that, on an individual

country basis, the investor base is too narrow and small to support the emergence of a truly dynamic capital market in any of

the three countries.

..……. even a regional capital market will continue to be small in the short to medium term and would benefit from linkages with

other markets in Africa and beyond that are experiencing rapid growth.

There is, on the other hand, an opposing view that favours the development of free standing national capital markets.

Proponents of this view argue that disparities in the levels of development of the

capital markets in the three countries and differences in their regulatory framework render the pursuit of market integration

meaningless and unattainable. ”

Mr. Godfrey Tumusiime, Director General, East African Development Bank

7th November 2003

Introduction

Benefits of integration Economies of scale (larger

and deeper market, cheaper to serve, more liquid, higher absorption capacity)

Economies of scope (savings from shared costs of central services (e.g. CDS)

Faster growth (cross border activity)

Shorter learning curve (shared experience)

Regionally & globally competitive as block

Introduction

History of cooperation in East Africa

1917 Customs Union between Kenya and Uganda,

Tanganyika joins later in 1922

1919 East African Currency Board

1948 High Commission 1961 Common Services

Organisation 1961 Tanzania independence 1962 Uganda Independence 1963 Kenya Independence 1967 EAC Treaty Signed 1971 Idi Amin coup in

Uganda

Introduction

History of cooperation in East Africa cont’d..

1977 EAC Collapses 1986 NRM Government in

Uganda 1993 Permanent Tripartite

Commission for East Africa Cooperation

1999 Revived EAC Treaty is signed

2000 Entry into force of the Treaty

2002 NARC Government in Kenya

2004 January, EAC Customs Union protocol to be

signed

The East African Currency Board

Established in 1919 and started issuing legal tender of Kenya, Tanganyika and Uganda in 1920

Par value of £1=Shs 20 EA

Ultimate aim was to anticipate and to pave the way for the creation an East African Central Bank

June 1965 – Ministers of Finance announce in their budget speeches that separate currencies and national central banks would be created in 1966.

The East African Currency Board cont’d……

Tanzania was of the view that an EA central bank could only work effectively under a political federation

Uganda preferred semi-autonomous national banks linked to a central reserve bank directing certain functions

Kenya preferred one central bank responsible for the common currency

The limitations imposed on national economic policies and ambitions soon after independence

No previous experience of one central bank serving two or more independent states

The East African Community 1967-1977

Signed in Kampala in June 1967

Focus was mainly on commercial exchanges, open inter-territorial trade, balanced industrial development and taxation policy in a common market system

First provision was for the free exchange of the national currencies and these actually traded at par for a couple of years

Partner States were required to “harmonise their monetary policies to the extent required for the proper functioning of the common market.”

EAC collapsed in 1977, when the Finance Council failed to approve the 1977/78 EAC budget

Why did the first EAC collapse

Intra-community political differences

Differences in the sharing of benefits from the jointly owned common services and lack of policy for redress

The then East-West divide

Low private sector and civil society input in the community

Lack of a shared vision

NO POLITICAL WILL

Revival of the East African Community

30.11.93 Permanent Trip’tite Commission for

EA Cooperation established

14.03.96 Cooperation Secretariat established - the

executive arm

30.11.99 EAC Treaty signed in Arusha

07.07.00 Entry into force of EAC Treaty

30.11.01 Inauguration of the EALA and EA

Court of Justice Jan 2004 Signing of the EAC

Customs Union Protocol

NEW EAC PEOPLE CENTRTED, PRIVATE SECTOR DRIVEN

EAC Convergence Criteria

Maintenance of low underlying annual inflation of less than 5 percent.

High and sustainable annual rate of growth of real GDP of at least 7 percent per annum.

Sustainable current account deficit to GDP ratio.

Budget deficit to GDP ratio (excluding grants) of less than 5%.

National savings to GDP ratio of at least 20 percent in the medium term.

Gross foreign exchange reserves equivalent to at least 6 months of imports in the medium term.

EAC Convergence Criteria cont’d…. Maintenance of low market

determined interest rates.

Maintenance of stable market determined exchange rates.

Pursuit of debt reduction initiatives to reduce both domestic and foreign debt to sustainable levels.

Maintenance of prudential norms of banking regulation, strict supervision, improved corporate governance and transparency of all financial transactions.

Progressive Performance

Average GDP growth rates in Uganda and Tanzania at 5.0 percent but declining growth in Kenya. Kenya trend has reversed with NARC Government

Source: MD Sajjabi Presentation AACB Kla

-1

0

1

2

3

4

5

6

7

8

9

Uganda

Kenya

Tanzania

Progressive Performance cont’d….

Inflation has been contained within single digit levels in the three countries

Source: MD Sajjabi Presentation AACB Kla

-5

0

5

10

15

20

25

Uganda

Kenya

Tanzania

Progressive Performance cont’d….

Current account to GDP (exc. grants) has declined to less than 5.0 percent in Kenya and Tanzania but Uganda’s deficit remains high at more that 13.0 percent.

- Trend of Budget deficit is similar.

Source: MD Sajjabi Presentation AACB Kla

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Uganda

Kenya

Tanzania

Capital markets integration journey

Nairobi Stock Exchange was the bourse for all East African Companies from 1954

1977 Collapse of EAC Non- Kenyan companies de- listed Capital Markets Authority (K) born

1990 Capital Markets and Securities

Authority born 1994 Dar es Salaam Stock Exchange

born 1996 Capital Markets Authority (U) born

in 1996 Uganda Securities Exchange born

in 1997 MOU establishing EASRA in 1997 (East African Member States Securities

Regulatory Authorities) Full stock exchange membership 1999 CMDC established April 2001 (Capital Markets Development Committee)

Capital Markets highlights of the EAC Treaty

Article 85Implementation of capital market development program and creation of conducive environment for the movement of capital within the Community

Article 86Develop, harmonize and integrate financial systems

EASRA’s Mandate Develop common capital market

strategies Harmonize laws and structures Foster regional stock exchange

(with a trading floor in each capital)

Facilitate cross-border trade & issues

Facilitate national status for East Africans

Development of market infrastructure

Development of policy proposals for capital markets incentives

Development of proposals for the alleviation of impediments

Development of a common trading system

CMDC’s Mandate

Sectoral Committee of the EAC

Makes policy proposals to the three member states through the EAC secretariat

Makes joint proposals with the fiscal and monetary affairs committee to EAC Finance Ministers at annual pre-budget meeting

Snapshot of the regional market

-

100

No. of Listings

Country

Equity Listings

Equity Listings

Equity Listings 50 5 6 61

Keny Ugan Tanz Total

-

50

100

Popn In Millions

Country

Population

Population

Population 31 24 37 92

Kenya Uganda Tanzani Total

Snapshot of the regional market cont’d…..

-

2,000.00

4,000.00

USD Millions

Market capitalization as at 18th Nov. 2003

Series1 3,467.00 661.60 680.24

Kenya Uganda Tanzania

Listed Bonds

-

10

20

30

40

50

60

70

Country

No

of

Lis

ted

Bo

nd

s

Government Corporate

Government 60 - 3 63

Corporate 4 2 2 8

Kenya Uganda Tanzania Total

Snapshot of regional market cont’d…..

GDP at current market price (US$ Billions)

11.5

5.8

9.2

0

2

4

6

8

10

12

14

Kenya Uganda Tanzania

Country

GDP

US$

Bill

ions

GDP at current marketprice(US$ Billions)

Progress on Market Integration

Legal and Regulatory Common English Law system Harmonization of legal framework

(on-going) Harmonization of disclosure

requirements (on-going) Harmonized trading rules and

procedures Corporate governance guidelines Framework for dispute resolutions Framework for Collective

Investment Schemes Guidelines on the issue of

corporate debt Cross border listing requirements

regulations CDS Legislation (on-going)

Progress on Market Integration cont’d….

Structural/Institutional Common market

structure (3-tier) Establishment of a

regional CDS (on-going) Development of websites Training and study tours Regional certification

program (on-going) Regional studies Cross border listings

Progress on Market Integration cont’d….

Policy According all East

Africans domestic investor status (ongoing)

Regulatory consolidation (discussions)

Harmonization of tax rates and tax incidences

Provision of tax incentives

Pension sector reform

Other regional integration initiatives in Africa

The West African Stock Exchange (BVRM)

BVRM

- Created; 18th December 1996

- Activities started; 16th September 1998

- Member countries; Niger, Mali, Burkina Faso, Benin, Togo, Cote D’Ivoire, Senegal, Guinea Bissau

- Population:74.30 million- GDP; US$ 26.17 billion(40%

for Cote D’Ivoire)- Growth Rate: 2.6% (2002)- Inflation Rate; 3.1% (2002)

BVRM Cont’d….

Burkina Faso – 1 Benin - 2 Cote D’Ivioire - 38 Guinea Bissau - 0 Mali - 0 Niger – 0 Senegal – 2 Togo - 2

No. of listed companies

2% 5%

85%

0%0%0%4% 4%

Burkina faso

Benin

Cote D'Ivoire

Guinea Bissau

Mali

Niger

Senegal

Togo

BVRM Impacts

Increase in savings rate - 1996 = 12.90% - 2000 = 16.05% Mobilization of long term

capital-Treasury bonds of Cote D’Ivoire

<-> US$98.46million- Bonds of Chemical industry of Senegal <-> (=US$ 23.08 million- Bonds of Telecommunication Company of Senegal <-> US$ 18.46 Million- Bonds of Bank of Africa of Benin <-> US$7.69 Million

Other regional integration initiatives in Africa

Southern African Development Cooperation’s (SADC) – Committee for Insurance Securities and Non bank financial Authorities (CISNA)

African Stock Exchanges Association (ASEA)

Challenges and stumbling blocks

Macro economic stability Policies not fully

harmonized (e.g. foreign investment restrictions)

No free movement of people, capital and investments

No single currency Low level of awareness High poverty levels Poor savings culture Different paces towards

liberalization Tax policies not fully

harmonised Not single investment area

Challenges and stumbling blocks cont’d… Lack of depth and

liquidity Information asymmetry Regulation arbitrage Underdeveloped and

unliberalised pension sector

Development of long term insurance sector

Raising more savings to finance investments

Multiplicity of regional blocks (map illustrates)

Conclusion No integration will succeed

without political will Regional integration is a

way forward if Africa’s capital markets are to compete in the global market

Explore regional stock exchanges. BVRM good example. Alliances can be a good first step

African Union and NEPAD should provide backbone

EAC made significant progress towards integration/single market

Quote…

“ ‘Emerging Markets’ may be a euphemism but it is also a declaration of hope and

faith. Although some of the stock markets of

developing nations may sometime seem

‘submerged’, they are generally emerging into

bigger and better things”

Mark Mobius, Investment Manager, Templeton

Emerging Markets Group

References

Capital Market Integration in the East African Community, the World Bank, December 2002

East African Community Treaty

Achieving market integration; Scott McCleskey 2003 (Elsevier Butterworth Heinaman)

Sub-regional monetary integration: challenges and prospects. The case of the East African Community (EAC). Presented at the 27th annual assembly of the Association of African Central Banks (AACB) by M.D Sajjabi , Economist (fiscal and monetary) East African Community secretariat; 18th August 2003, Kampala, Uganda

For more information contact

Capital Markets Authority76/78 William Street

Bank of Uganda BuildingP. O. Box 24565

Kampala

Tel: + 256 041 342788Fax: +256 041 342803

Email: cma@starcom.co.ugWebsite:

www.cmauganda.co.ug

THANK YOU