The JSE: a catalyst for African centres
The Johannesburg Stock Exchange (JSE) is looking to develop its regional presence in Africa as economic growth continues on the continent as country risk premia continue to fall and investment inflows grow writes KEITH BOYFIELD

April 2011: Africa is currently attracting strong investor interest. This was confirmed by the quality of the delegates to an invitation-only event held last month at London’s Savoy Hotel for CEOs interested in investing in the continent. The conference was sponsored by The Times and the newspaper’s editor, James Harding, acted as the enthusiastic chairman. None other than Lord Jacob Rothschild welcomed attendees to a pre conference dinner at Spencer House, which he has meticulously renovated on a 125 year lease from the late Lady Diana Spencer’s family trustees. One of the guests that first evening was Alhaji Aliko Dangote, the wealthiest man in Africa with a personal fortune estimated by Forbes magazine at $13.8 billion. Mr Dangote’s successful development of the Dangote Group, which now operates across 14 African countries, is an impressive example of how astute investors can reap rich rewards on the revitalised continent.

Africa has been able to ride out the worst chills of the latest global recession. As Goldman Sachs point out the continent began to benefit from rapid growth between 2000 and 2008, when regional GDP climbed at an annual average rate of 5.6 per cent. This improved performance was broad based: more than half of Sub Saharan African (SSA) countries grew by more than 4 per cent a year and no fewer than three ranked within the top ten fastest growing countries in the world. More recently, seven countries – Angola, Nigeria, Ghana, Kenya, Tanzania, Zambia and Mozambique have joined the 7 per cent Club, countries whose GDP will double in a decade at their current rate of growth. Veronica Kalema, Director at the Sovereign and International Public Finance department at the ratings agency Fitch Ratings notes that ‘This improvement reflects a number of factors: better macroeconomic management, economic liberalisation, improved political stability and democratisation which improved confidence and encouraged domestic and international investment’.
Maureen Dlamini, Executive Head of the JSE's Africa Board, is keen to develop a dialogue with growing companies throughout Sub Saharan Africa as part of the JSE's strategy.

Africa has benefitted from the surge in commodity prices. The continent is rich in mineral wealth while oil and gas has been discovered in increasing quantities, notably in Angola, Ghana, Uganda and the Southern Sudan. Ambitious plans are now being worked on to develop pipelines to transport this oil to ports such as Mombasa and more controversially, Lamu in Kenya.

There has also been a surge of interest in large scale commercial agriculture. In February 2011, for example, Sime Darby, the world’s largest publicly quoted palm oil producer, announced a proposed investment in a 300,000 hectare plantation in Cameroon; this follows the completion of a deal involving a 220,000 hectares concession awarded in Liberia in 2010. Other major investors include Wilmer International , which recently acquired a plantation from Unilever in Ghana; the Singapore-listed Golden Agri Resources; and Olam International , also listed in Singapore, which has concluded an agreement to develop a 300,000 hectare joint venture in Gabon. Combining the country’s offshore oil reserves with palm oil processed from plantations inland, investors are developing the ability to export ready-mixed biodiesel to Europe to meet the expected rise in demand following the adoption of a new EU directive on renewable fuels due to be implemented in 2012.

Against this promising economic background the Johannesburg Stock Exchange (JSE), one of the world’s 20 largest exchanges, is seeking to develop its continental presence. In recent years there has been much talk about creating a continental bourse yet not much has been achieved in practice. There remain 24 stock exchanges throughout the continent, ranging in size from the OTC market in Rwanda to the JSE in South Africa with a market capitalisation of over $800 billion. Lately, however, there have been concerted moves to develop regional centres. Last month’s Financial Centres International, for example, reported on moves to make the new Nairobi International Financial Centre a regional hub that will challenge Johannesburg and Mauritius in the growing market for financial services. As part of this Kenyan initiative, a steering committee has been set up to oversee a review of the legal system regulating financial services.

The majority of investors in these African markets are foreign, and many of them are from outside the continent. In recent years there has been a rush of interest from China, which now accounts for 14 per cent of SSA’s total exports compared with 4 per cent in 2000. Most of these exports are natural resources - copper, iron ore, oil et al - but commodities such as cotton and timber are also significant. China’s latest five year economic plan, agreed in Beijing last month, confirmed the continued demand for Africa’s natural wealth, notably minerals such as iron ore.

Yet there remain a number of problems hindering the growth of companies in the developing countries throughout SSA. Among them are a lack of liquidity, asymmetric and inefficient flows of information about the companies quoted on exchanges, inconsistent regulation notably exchange controls, and a lack of benchmarks to track performance across multiple investor strategies. In order to address these perceived shortfalls the JSE has established an African Board to provide the opportunity for companies to gain a second listing on the JSE to complement the one they already have on their domestic exchange. In so doing, the JSE has created a number of indices to track companies’ performance. The third element of the JSE’s strategy is the development of its Africa Hub, a platform that will facilitate trading connectivity between participating capital markets. Humphrey Borkum, JSE’s Chairman, explains that ‘The mineral resources of sub-Saharan Africa was a key consideration in the JSE launching its African Board - offering dual listings to firms from outside South Africa and setting fees that would only cover our costs’.

Maureen Dlamini, the Zambian born Executive Head of the JSE’s Africa Board, is keen to develop a dialogue with growing companies throughout SSA. The JSE is committing substantial up- front investment to this effort and recognises that the return on this capital outlay will take some years to recoup. Mrs Dlamini recognises that a number of misconceptions have grown up over the years about listing on the JSE. She emphasises that non resident shareholder holdings on dual listed companies will not be subject to South African capital gains tax so long as these shareholders do not hold over 20 per cent of the equity shares issued, nor will the company’s tax residence be affected provided its business activities are undertaken outside South Africa.

“But given the size of some of the companies, the 20 per cent threshold for capital gains tax could be easily reached, especially by strategic holders”, suggests Sanjeev Chhugani, a former African broker and current partner with financial technology venture developer TaoStrategix. He adds. “Investors from jurisdictions that do not hold double tax treaties with South Africa could be swayed towards trading via bourses where double tax treaties are in place”.

In the past, it is also fair to say that the JSE gained a reputation for arrogance in its dealings with companies across the continent. However, Maureen Dlamini is determined to show that such perceptions are no longer valid. “We are more humble now”, she observes, “we have a much better and more accurate appreciation of who we are dealing with”. She highlights in particular the sophistication of securities transactions on exchange such as Nairobi where investors are “deeply knowledgeable”.

Certainly, it is the case that the JSE scores well in international comparisons. The World Economic Forum’s Global Competiveness Report 2010-11 rated South Africa’s securities exchange regulation as the best in the world in terms of regulatory standards. The JSE also scored well on protection of minority shareholders where it ranked sixth and on the soundness of its banks where it also came sixth; with respect to financing through the local equity market and the availability of financial services the JSE ranked seventh worldwide. Commenting on these scores, Russell Loubser, JSE’s Chief Executive says this ‘reflects our transformation from a single product equity exchange to a well regulated fully horizontally and vertically integrated exchange’.

The JSE announced its financial results for the calendar year 2010 on 15th March. The results reveal that JSE’s operating costs before net finance income rose by 8 per cent to R879 million (in 2009 they amounted to R810 million), resulting in a net profit after tax of R378 million compared with R366 million in 2009. Much of the cost increase can be attributed to expenditure related to the JSE’s large IT projects, including the development of its Africa Hub . “Technology spend is forecast to continue in 2011, as the push continues to expand information products, attract more business on the interest rates and derivatives platform, create indices and attract African issuers” comments TaoStrategix’s Sanjeev Chhugani.

The number of new company listings on the JSE rose to 14 in 2010 compared with ten in 2009. One of these was on the alternative market known as AltX and just one on the Africa Board. Loubser observes that “Listings remained subdued, an experience shared with most other members of the World Federation of Exchanges”. But he adds that 2010 was notable in so far as it saw the listing “of Wilderness Safaris – the second Africa Board listing,” Nonetheless, the fact that there are only two companies listed on the Africa Board must prove a disappointment to the JSE. As TaoStrategix’s Sanjeev Chhugani says, “It’s very competitive. The battle of hearts and minds has yet to be won. Competition within local bourses is intense and with foreign investors entering the market directly, regional brokers still need to be convinced that they will not be squeezed out by a larger, better capitalized neighbour. When either considering a migration or dual listing, companies of sufficient size tend to look Northwards and nowadays, further East. Hence, the JSE has to convince companies that it has the ability to offer a cost effective balance of liquidity and technology to induce companies to migrate South. From an investor perspective, increased liquidity is very attractive, and where local bourses do not provide this, derivative solutions and depository receipts can be put together. Hence, the JSE is also in effect competing against these alternatives.”

What is the JSE’s management focusing on to make it more attractive? Well, Nigeria is clearly a key target for the JSE’s Africa Board. Underpinned by a soaring oil price the JSE’s management believe that they can offer a broad and deep range of financial services that will enable Nigerian companies to grow faster. However, in offering to serve as a catalyst the JSE faces a competitive challenge from the LSE and NYSE. Significantly, Aliko Dangote has opted to take a secondary listing in London for his core business, Dangote Cement. But Maureen Dlamini reckons that her colleagues are now in a position to understand the dynamics of the Nigerian economy in a much more knowledgeable manner. The opportunities are immense: Nigeria is currently enjoying a boom with Goldman Sachs predicting a growing middle class will create a strong new consumer market for African goods and services. As Oxford Analytica note, Johannesburg, a city of four million people, hosts 70 large shopping centres. Lagos, a city of almost 11 million people, hosts one.

The JSE has established an Advisory Committee to guide the development of the Africa Board. Significantly, two prominent Nigerian business leaders are on the Committee – Gbenga Oyebode, the Managing Partner of the law firm Aluko Oyebode and Bolaji Balogun, CEO of Chapel Hill Denham Group, the financial advisory firm. Another leading African business figure on the Committee is Dr Mo Ibrahim, the Sudanese born billionaire and founder of Celtel, the African mobile telecoms operator.

What is noticeable when meeting SSA business leaders – many of them attended The Times conference - is the fact that there has been a generational shift. Business leaders have often been educated abroad and attended some of the most prestigious universities and business schools. They have also picked up valuable experience working for leading banks, law firms and companies – Dr Donald Kaberuka , President of the African Development Bank and Wale Tinubu, the CEO of Oanda Group, the integrated energy concern well illustrate this trend. With this experience under their belts, Africa’s new generation of business leaders are firmly committed to tackling some of the continent’s most persistent problems, notably corruption, restrictive labour regulations, inefficient government bureaucracies and tariff barriers. If they achieve only half of their goals, the continent should fulfil the economic promise that Goldman Sachs predicts, underpinned by the rule of law and observance of clearly defined property rights. As country risk premia continue to fall, investment inflows will accelerate.