East African Stock Markets Contemplates Issuing ‘Dollar-Denominated’ securities to cushion investors

(3 Minutes Read)

CEOs of East African stock markets are considering a policy shift to allow them to issue debt instruments in hard currency to open competition with commercial banks over the issuance of foreign currency-denominated loans to companies largely involved in international trade.

The proposal which regional central banks are still reluctant to approve, seeks to allow companies to raise fresh capital from the capital markets by issuing bonds denominated in hard currency, particularly the US dollar. The East African Stock Exchanges Association (EASEA) says this will cushion issuers and investors from massive exposure to local currency risks where foreign investors and companies dealing in international trade absorb exchange rate risks.

As far as EASEA is concerned it is a matter that central banks must approve. But the issue is most African economies do not allow people to issue instruments in hard currency except governments which can issue Eurobonds. Banks are allowed to trade in hard currency; however, capital markets are not allowed which is counterproductive, stated EASEA chairman and chief executive of the Rwanda Stock Exchange (RSE) Celestin Rwabukumba.

Currently, debt and equity capital-raising instruments on regional exchanges including bonds, initial public offerings (IPOs), and rights issues are offered in local currencies. The regional lobby group, EASEA, says discussions over the use of hard currency are currently at different levels. If one can get a loan from a commercial bank in hard currency, why can’t the market issue a bond in hard currency in the capital market, asked Rwabukumba. Sometimes investors are wary of local currency exposures, he added. The discussions over the use of hard currency in capital markets instruments are also taking place within the technical committee of the African Securities Exchanges Association (ASEA) which brings together 25 exchanges serving 37 African countries.

ASEA in collaboration with the African Development Bank is working on a project to link African stock exchanges electronically to reduce transaction costs in stock market trading across the continent. The e-platform (The AELP Link) was launched in December 2022 enabling seamless cross-border securities trading among seven African stock exchanges representing 2,000 companies with roughly USD 1.5 trillion market capitalisation.

The first phase of the AELP connected seven stock exchanges across 14 African countries including Morocco, Egypt, Nigeria, and Kenya. Others are Mauritius, South Africa, and the West Africa Economic and Monetary Union, which comprises Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.ASEA and AfDB on June 28 2023 signed an agreement for a USD 600,000 grant to expand the number of linked African exchanges from 7 to 15 under the second phase of the African Exchanges Linkage Project (AELP).

The project seeks to link African capital markets, thereby promoting cross-border securities trading, increasing liquidity and diversifying investment opportunities for investors.AELP’s second phase will provide investors access to over 2,000 securities listed on up to 15 capital markets through a cross-border securities trading platform tailored to the needs of regulators, central depositories, policymakers, and stockbrokers.

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The objectives of the AELP align with the African Union’s Agenda 2063 and the African Continental Free Trade Agreement’s goal of establishing a liberalized market to ease the movement of capital and investments and deepen the continent’s economic integration.

AfDB also supported the first phase of the project which involved setting up an infrastructure interconnectivity platform involving seven stock exchanges and 31 stockbrokers.