EAGLE IN FLIGHT

Zambia 2014 | FINANCE | REVIEW: CAPITAL MARKETS

Having now entered its third decade, and a champion of transparency with sophisticated infrastructure in place, the Lusaka Stock Exchange (LuSE) is poised to reap a more dynamic capital market environment.

Like any other stock exchange, the fundamental principle behind the foundation of the Lusaka Stock Exchange (LuSE) in 1993 was the fostering of an investment climate conducive to the pooling of liquidity to further local industry and support the broader economy. This is part of a systematic process of national emergence that for half a century has, among others, seen World Bank mentoring. And as World Bank Country Director for Zambia, Kundhavi Kadiresan, explained in a TBY interview, “We deliver more than just funding support. We also provide technical assistance, policy dialogue, analytical work, and knowledge exchange programs." Indeed, the bourse's internal workings benefitted from technical guidance from both the World Bank and International Finance Corporation (IFC).

And once trading had begun on February 21, 1994, its first two years of life were funded by the UN Development Programme (UNDP) and the Zambian government to ensure longevity, given the central role of the capital markets in private sector development, and the reduction of state involvement in the financial arena. The financial regulatory framework that has resulted in the interim, has set on a steady path the banking and financial services and insurances sectors, leading to the creation in 1994 of the capital markets watchdog, the Securities Exchange Commission (SEC). The year of 1994 also saw the establishment of Zambia's Central Securities Depository (CSD), the entity rendering centralized depository, clearing and settlement facilities. A decade later in 2004, the government introduced its Financial Sector Development Plan (FSDP), aimed at cementing a reliable, market-based financial system capable of diversifying the economy and supporting sustainable growth.

TERMS AND PERFORMANCE

Zambia's capital markets are regulated by the Banking and Financial Services Act (BFSA) of 1994 (amended in 2000) and the Securities Act of 1993. The central bank, the Bank of Zambia (BoZ), is the ultimate regulatory of both the banks and non-bank financial institutions. The LuSE is a non-profit limited liability company, on which trading is executed in Zambian kwacha (ZMW) between the hours of 11:00 and 14:00 (GMT+2), with T+3 clearing and settlement. According to Index Mundi data, the market capitalization of listed companies as a percentage of GDP dropped from 20.87% as of 2011 to 14.6% for 2012, ranking the bourse 68th out of 116 nations.

The LuSE 4Q2013 market capitalization print was ZMW58 billion on a 17% YoY appreciation. In the equity market the benchmark LuSE All Share Index (LASI) closed at 5,300.1 points, on an impressive 43% YoY gain, and was 10.5% up YoY for 4Q2013. That quarter saw 1,389 trades, marking a 17.51% YoY rise, although the trading volume was drastically down 83.8% YoY at ZMW68,974,033 for the period. Meanwhile, turnover at ZMW70,550,876 was up a solid 133% YoY with a turnover to market cap ratio of 0.42% for 2013, down from 0.73% in the same period of 2012. More recent available data for 1Q2014 indicates a pronounced increase in the volume of shares traded in 1Q2014 over the 4Q2013 print. This resulted from the rights issue of Copperbelt Energy Cooperation Plc, which saw a 95.95% subscription rate wherein just 25,360,242 of the 625,000,597 shares offered were not taken up by existing shareholders. Meanwhile, trade turnover, too, climbed a steep 64.14% YoY in 1Q2014. In the words of the bourse itself, “The market is steadily becoming an information sensitive market where investors respond to."

EVENTS OF AUGUST 2014

The LASI closed August at 6,208.60, up 1.21% MoM and 16.5% Year-to-date. As of August 31 2014, on average, daily market volume and turnover respectively stood at 386,584 and ZMW7,372,941. August saw 384 trades in Equity trading, on a volume of 7,731,688 and turnover of ZMW147.5 million. Meanwhile, the bond market registered 12 in government bond deals. Total net inflows of $12,037,431 and outflows of $488,844 were recorded, wherein the foreign participation rate was at 51.4%.

Meanwhile, on the listing front, Madison Finance conducted an IPO (20 million shares listed) closing on August 1, 2014, from which it raised ZMW62 million. Madison Financial Services was set up in 2007 as a vehicle for the entry of the IFC through equity and for a five-year period that sunsetted in December 2012. The IPO, then, constituted in part an exit vehicle for the IFC. Madison Financial Services dates back to the 1992 establishment of Madison Insurance Company Zambia as the nation's first private insurance player upon the liberalization of Zambia's insurance sector.

SELECTED PLAYERS

The LASI closed 1Q2014 at 5,814.49, up 39.6% YoY from 4,165.87. In terms of capital gains, as of end-March 2014, of the 21 listed companies six outperformed the index. These were Airtel Networks (formerly Celtel), Africa's largest mobile operator, at 24.00% (up 3834.4% QoQ), Zambia Sugar at 6.83% (up 2526.9% QoQ), Metal Fabricators of Zambia at 5.00% (up 1011.1% QoQ), Bata Shoe at 0.83% (up 492.7% QoQ), British American Tobacco at 5.75% (up 187.50% QoQ), and Lafarge at 24.00% (up 179.1% QoQ).

BONDS

In 2012, the BoZ prohibited the FX pricing of goods and services, which sent the dust flying among those businesses to have issued bonds in dollars. These now found themselves vulnerable to currency fluctuations, given that future revenues were to be denominated in kwatcha. As Risk.net put it, “This necessitated demand for an exchange-traded, currency futures-hedging instrument."

ENTER BADEX

To also promulgate interest in and growth of the local bond market, the BoZ in June 2013 opened the Bond and Derivative Exchange (BADEX) to operate in parallel with existing bond trading on the LuSE. Regional and international markets have yet to participate since the initial trade on April 15, 2014, which was a US dollar/Zambian kwacha futures contract. BADEX mandated three local banks to operate as clearing members and serve as third parties to all futures and options contracts. These were BancABC, Finance Bank of Zambia, and Zambia National Commercial Bank. In addition, 2013 saw a series of dummy trades to test system integrity, and the pioneering trade on April 15 involved a two-month futures contract between BancABC and a client. The principle technical and advisory force behind the BADEX is South Africa-based financial services outfit Dreadnought Capital, itself headed up by an erstwhile Johannesburg Stock Exchange executive.

Zambian independence was followed 30 years later by the birth of its equity market. And in a joint celebration, the LuSE and SEC in October 2014 staged a Capital Markets Exhibition Week, not least to promote the latest capital markets offering, namely the LuSE Alternative Market (or Alt-M), a vehicle for Zambia's SMEs. Broadening the financial inclusion of this vital element of the economy, accounting for over 90% of the economies of Sub-Saharan Africa, can only bode well for the Zambian capital markets of tomorrow.