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East African Stock Markets Contemplate Dollar-Denominated Securities to Bolster Investor Confidence

Innovative Shifts in East African Equities: As East African stock markets navigate the complexities of global trade, executives are deliberating a significant policy shift. The proposal under consideration involves allowing companies to issue debt instruments in hard currency, primarily the US dollar. This move aims to introduce a competitive edge against commercial banks, particularly in extending foreign currency loans to firms deeply involved in international trade.

Central Bank Hesitancy: Despite its potential benefits, the proposal encounters resistance from regional central banks, wary of approving such a novel approach. The crux of the matter lies in the necessity for central bank endorsement, given the current regulatory landscape where only governments can issue Eurobonds, and commercial banks are privileged to trade in hard currency, leaving capital markets sidelined from such transactions.

Seeking Stability Amidst Currency Risks: Proponents of the plan stress its ability to shield both issuers and investors from the significant risks associated with local currency fluctuations. Currently, debt and equity instruments traded on regional exchanges are exclusively denominated in local currencies. However, recognizing investors’ apprehensions regarding local currency exposures, there’s a growing consensus within East African Stock Exchanges Association (EASEA) to explore incorporating hard currency instruments.

Collaborative Efforts for Market Integration: Concurrently, discussions within the technical committee of the African Securities Exchanges Association (ASEA) are underway, signifying a broader continental effort towards market integration and efficiency enhancement. These deliberations align with initiatives such as the African Exchanges Linkage Project (AELP), facilitated by ASEA in collaboration with the African Development Bank (AfDB).

Facilitating Cross-Border Trading: Launched in December 2022, the first phase of AELP successfully connected seven stock exchanges across 14 African countries. Now, plans are in motion to expand this network to 15 exchanges, aiming to provide investors access to over 2,000 securities listed on various capital markets. Such initiatives resonate with the goals outlined in the African Union’s Agenda 2063 and the African Continental Free Trade Agreement, fostering market liberalization and capital movement to bolster economic integration across the continent.

AfDB’s Support: The continued support of the African Development Bank underscores the significance of initiatives aimed at strengthening African capital markets. This support aligns with broader developmental agendas, fostering an environment conducive to investment and growth.

Unlocking Opportunities: The contemplation of dollar-denominated instruments signifies a crucial step in enhancing resilience and attracting global investors amid evolving economic landscapes. While challenges persist, concerted efforts by regional stakeholders promise to unlock new opportunities and propel Africa towards greater financial inclusion and prosperity.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

9th April, 2024

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