The limited role of small stock exchanges in economic development: A case study of Mozambique and Swaziland

Abstract

The establishment of a successful stock market in a developing economy can provide a major source of development finance, both channelling domestic savings and attracting foreign investment. But small markets generally fail. Two micro-markets, Mozambique and Swaziland, provide an interesting case study to examine the features of new markets in sub-Saharan Africa that differ in a number of ways, including colonial legacy, membership of the Common Monetary Area and the dynamics of the political economy that defines the links between the citizens, the local elite and the state. In both countries, the operational aspects of the stock exchange are clearly inadequate as a means of promoting international investment. Thus, gains from regional integration initiatives or foreign investment are unlikely, as the market's small size and incomplete institutions currently offer limited potential for either domestic or international risk diversification. However, the political economy in both countries is the real barrier to growth.

Keywords:

• political economy
• frontier stock markets
• Mozambique
• Swaziland

1. Introduction

With the restructuring of global capital flows since the end of the cold war, international portfolio investors and financial institutions have become increasingly interested in developing market finance. This has sparked extensive debate over what kind of development policy-makers should prioritise as the source of external finance: indigenous banking systems or stock markets (Yartey & Adjasi, 2007). Proponents of banking sector development assert that stock markets are a costly irrelevance to poor countries. Rather, they say, these countries should adopt the most economically effective form of sustainable finance to promote growth, which is commonly a banking system inherited from former colonial authorities (Singh, 1999). Banks have seen considerably more growth in sub-Saharan Africa than stock markets and are often the dominant source of finance (Kenny & Moss, 1998).

Promoting sustainable forms of finance to boost economic growth and alleviate poverty in developing countries is a key objective of international financial institutions such as the International Monetary Fund (IMF) and the World Bank. It is also the focus of national structural adjustment programmes that aim to establish a free capital market to support the privatisation of state-owned enterprises, which in turn broadens ownership, improves economic performance and increases efficiency. These institutions and programmes therefore favour the newly established stock markets when it comes to raising capital to finance industrial expansion, mitigate risk, attract domestic savings, appeal to international portfolio investors and encourage foreign direct investment. However, these intended benefits are often diminished by inadequate regulation and poor systems of corporate governance. In addition, unstable macroeconomic environments create an information asymmetry for domestic and international investors alike. Consequently, risk premiums faced by investors and the cost of equity incurred by issuing companies are high, with the result that liquidity in these markets is very low.

Mozambique and Swaziland make an interesting case study of newly established stock exchanges in sub-Saharan Africa. Both are countries currently following a policy of privatisation, both have low levels of gross domestic product (GDP) per capita and both would benefit from any initiative that helps to promote economic growth. They also share a border and are members of the Southern African Development Community (SADC), which is made up of many southern and eastern African states. But they also differ in several ways. Swaziland, unlike Mozambique, is a member of the Common Monetary Area (CMA) and Southern African Customs Union, both of which are composed of Namibia, South Africa, Swaziland and Lesotho.1 Other differences are their cultural and legal heritage, their political economy of share ownership and their initial motivation for establishing a stock exchange. Both markets, because they are small and defined by minimal listings and listed capital and inadequate institutions, have little success attracting foreign investment or promoting economic growth. They may, however, seek different ways to improve their performance.

The paper proceeds as follows. Section 2 reviews the literature on stock markets versus banking systems in developing countries; Section 3 describes a selection of sub-Saharan African stock markets, concentrating particularly on those that are small or medium sized; Section 4 assesses the evolution, structure and performance of the Mozambique and Swaziland stock markets and examines the implications for domestic and international portfolio investment; Section 5 compares the two markets and suggests some policy recommendations to improve their performance, attract foreign investment and enhance economic growth; and Section 6 concludes.

2. The impact of stock markets on economic development in sub-Saharan Africa

It is now securely established in the literature that a well-developed financial system with strong intermediaries increases productivity, technology diffusion and economic growth (see Levine & Zervos, 1996; Rousseau & Wachtel, 2000; Minier, 2000). This includes theoretical and empirical contributions from the fields of economics, development and finance, most of which have focused on the direction of causality between the establishment of well-developed financial intermediaries and economic growth. For example, Levine & Zervos (1996) find strong evidence that the development of strong financial intermediaries, and specifically stock markets, are causally prior to economic growth, and several authors have used multiple country panel data models to test this relationship. Studies such as Rousseau & Wachtel (2000) use a two-stage panel regression for a number of countries and find that the value of traded securities accounts for economic growth more than for market capitalisation. Finally, studies using time series techniques and panel vector autoregression find that causality flows from both traded value and market capitalisation to economic growth, with the former having the stronger effect (Minier, 2000).

A complementary literature concerns the origins of legal systems and particularly commercial law and this has been used to explain different success rates of stock market compared with bank based development in a number of emerging and developing economies (Beck & Levine, 2003). The consensus is that countries whose legal system is based on the French civil code offer less investor protection and fewer minority rights than those based on Anglo-Saxon law. The former group also have a lower likelihood of being on the frontier of innovation in financial intermediation and stock market development and a greater reliance on intermediation through established banking systems (La Porta et al., 1997; Modigliani & Perotti, 1997). Thus in Francophone countries the law is applied through a rigid set of codified principles and follows centralised regulation, whereas Anglophone countries are more likely to have financial markets that adopt systems of self-regulation (Weissbourd & Mertz, 1985).

The legal systems in sub-Saharan African countries that have a colonial history reflect these European patterns. Thus Mozambique has adopted a variation of the Napoleonic French civil code, which is similar to that of Portugal. Swaziland is more complicated. It has been heavily influenced by a judiciary shared with neighbouring South Africa, whose legal regime itself evolved from unique historical circumstances in contrast to the rest of Africa. The Roman-Dutch civil code in South Africa is derived from the pre-Napoleonic civil code in the Netherlands that was exported to the Cape Colony by the Dutch East India trading company in order to regulate its commercial affairs. Later, some influence of English common law was incorporated into the legal system of the Union (Visser & Zimmermann, 1996) and this combination is the basis of Swazi law. However, an additional complexity is that traditional Swazi law, which had no formal written doctrine until it was incorporated following a UNDP project in 2004, is also part of the national legal system that exists today (Tibiyo Taka Ngwane, 2004).

These differences in colonial legacy and the resulting legal institutions are one reason why the size and activity of stock markets vary across Africa. Many of the benefits of stock markets to a developing economy depend on well-established property rights. If these exist, suitable regulation can be designed to minimise transactions costs associated with information search and verification. Well-designed primary listings criteria minimise transaction costs and allow all publicly available information to be incorporated into prices. At the same time, the use of preferential, inside information can be forbidden, which protects secondary markets. Robust systems of corporate governance can also reduce agency costs associated with the separation of ownership and control (Macey, 1997).

Good governance and strongly enforced regulation provide the basis for investor confidence and enable wider market participation by both domestic savers and foreign investors. Dispersed ownership and increasing participation by an economically active domestic population are crucial to the establishment and development of stock markets. Encouraging wider domestic ownership in large former government controlled parastatals and attracting foreign multinationals increases the likelihood that the privatisation programmes in many African countries will be successful (Jefferis, 1995). This also provides a point of exit for venture capital firms that have supported a domestic start-up venture and are seeking to liquidate their investment (Black & Gilson, 1999). An active stock market increases efficiency, although well-publicised and familiar listings also increase the set of investment opportunities available to local investors and allow more diversified portfolios, with reduced risk.

Finally, stock markets actively reduce the costs of capital for listed firms by pooling funds from a widely dispersed base of retail and institutional investors that mobilise savings from households and individuals (Marone, 2003). By issuing stocks and bonds, companies increase the allocative efficiency of savings, which in turn raises the returns realised through the investments. But institutional investors are crucial to African markets, particularly insurance and pension funds. The benefits of substantial gains through risk diversification of large portfolios of investments and managed long-term asset growth generates demand for more investment and hence more savings can be channelled through portfolios (Jefferis, 1995). Investment and project finance can be valuable in ensuring allocative efficiency, with the highest return projects properly priced with respect to risk. Large markets are cost efficient as intermediaries, encouraging economic growth and industrial innovation and diversification. However, a major problem inherent in the vast majority of African stock markets is the lack of scale efficiency and, in addition, liquidity in many markets is insufficient to ensure price discovery. The challenge is to increase liquidity and reduce the cost of capital, increasing available funds by matching investors' risk preferences to corresponding projects of a certain risk-return level.

However, despite the perceived benefits to new investors that follow from share ownership there is contradictory evidence from some markets. One example is the integrated Francophone West African bourse in Côte d'Ivoire, which has failed to achieve high levels of activity and efficiency because of the historical tradition of participation in the domestic economy by local Ivorian elites that dominated the market (Lavelle, 2001). These groups took prominent social positions following independence and their economic dominance results from the highly skewed wealth distribution in the country. This privileged position in a population that is generally economically disadvantaged means that their participation in the local stock market takes the form of rentier capitalists and effectively maintains concentrated ownership. Thus, when the state relinquishes control, ownership simply moves to the small group that form the social elite and the population at large do not have a stake in their own economy (Lavelle, 2001). This accounts for one of the major differences between the two countries of interest in this paper, and is discussed further below.

3. Characteristics of African securities markets

With the exception of the Johannesburg Stock Exchange, Africa's stock markets are small, illiquid, have few listings and lack the sophisticated infrastructure and range of the tradable assets on developed Organization for Economic Cooperation and Development markets. Additionally, South Africa is the only market that has derivative instruments available to hedge risk and that permits short selling, since it has a well-developed and highly capitalised brokerage industry. The size of a selection of African markets is shown in Table 1, measured by market capitalisation. As the table shows, South Africa has the largest, in terms of market capitalisation both by volume and as a percentage of GDP. It is also the most active market, with a proportion of traded value to market capitalisation (turnover ratio) of 42. Also shown are the two countries of interest, both of which have a very low market capitalisation as a percentage of GDP and the turnover ratio. The very large turnover ratio for Namibia (128.29) reflects the artificially high demand for local stocks that have a primary listing in Johannesburg, which accounts for 67 per cent of the total market.

Table 1: Trading statistics on selected African stock exchanges, 2005

Market	Established	Market capitalisation (current US$ million)	Market capitalisation as percentage of GDP	Stocks traded, turnover ratio (%)
South Africa	1887	566 972.33	232.70	42.12
Nigeria	1960	15 134.36	24.69	10.69
Botswana	1989	13 399.60	148.86	1.80
Kenya	1954	5860.04	32.00	7.90
Côte d'Ivoire (BVRM^a)	1973/1998	2787.58	79.97	1.33
Mauritius	1988	2645.90	40.23	5.68
Zambia	1994	2456.00	26.55	0.63
Ghana	1990	1660.58	15.49	4.12
Uganda (2006)	1998	742.00	32.73	0.02
Tanzania	1998	587.86	4.67	4.08
Namibia	1992	414.94	6.67	128.29
Swaziland	1990	197.09	7.50	0.0026
Malawi	1996	101.93	5.36	1.98
Mozambique	2001	28.77	0.45	0.08
Notes: Market capitalisation data were unavailable for 2005 for Uganda, so 2006 data were used instead. Two dates for the Côte d'Ivoire exchange indicate transition in October 1998 from former national stock exchange in Abidjan to new Francophone West African regional exchange. ^aBourse Régionale des Valeurs Mobilières.
Source: Compiled by authors from national stock exchange websites and the International Finance Corporation statistics database.

Details of several other markets are also in the table and it is clear that in most cases there are low levels of activity. Although most exchanges have conducted domestic retail investor awareness campaigns, stock exchange investment is beyond the reach of large sections of these populations. Poverty remains a major problem in Africa, where 313 million live on less than US$1 per day (Marone, 2003). Furthermore, savings and investment patterns for many ethnic groups are centred on livestock and physical or agricultural commodities, and there is little inclination to trust formal monetary institutions. In addition, government constraints on investment patterns exist in some countries. For example, Regulation 28 in Namibia requires that 35 per cent of savings in pension and insurance funds must be invested in the domestic market (NEPRU, 2004) and a similar situation exists in Botswana, where a 30 per cent retention levy is applied (Piesse & Hearn, 2002). However, while forcing these funds to invest domestically could clearly be beneficial, this will only be useful for commercial financing and stock market investment if the flow of savings is sustained. Also, a negative impact of this policy is that in effectively subsidising national stock markets that are uncompetitive due to high costs of capital, the cost of this subsidy is carried by the local investment industry, which in turn has negative implications for domestic pension and insurance policy holders (NEPRU, 2004).

Other constraints to investment activity are the stringent listing criteria and capitalisation requirements, which reduce the supply of potential equity instruments. This has been partially resolved through innovation in national bourses by promoting alternative investment markets for smaller firms. Examples of these are the Alternative Exchange, AltX, in South Africa (Irving, 2005), the creation of a second tier of listing in the Lusaka Stock Exchange in Zambia, and the Gaborone Stock Exchange in Botswana. This means that companies that fail to meet the formal listing criteria can be quoted rather than listed and still gain from any benefits associated with the exchange (Marone, 2003).

Market capitalisation and liquidity are also increased by the release of government equity holdings through Initial Primary Offerings (IPOs), although the effects on liquidity are usually brief on exchanges other than South Africa's. IPOs are a valuable source of additional assets on the domestic market, raising the profile of the exchange as a source of capital. However, they are frequently politically unpopular because of the loss of state control even though many countries have privatisation programmes nominally in place. A combination of political economy considerations together with the high costs of capital explains the lack of listings across Africa. This is clear from Table 2, which lists funds raised through IPOs in several markets. Clearly, IPOs are a substantial source of new listings in South Africa, although this is small compared with a major market such as London.

Table 2: Funds raised from IPOs in selected African stock markets (US$ million)

	1998	1999	2000	2001	2002	2003	2004	2005	2006
UK (London)	7267.08	8732.04	19 147.71	9588.65	8650.74	6225.32	11 839.11	10 278.49	16 484.62
South Africa	608.38	96.06	229.12	591.96	168.06	0.00	81.94	179.18	3335.56
Nigeria	–	–	–	0.00	0.00	516.44	2022.93	11.83	903.16
Kenya	0.00	5.78	4.89	18.65	0.00	0.00	0.00	0.00	189.45
Mauritius	0.00	0.00	45.59	17.43	21.67	11.74	28.63	151.52	0.97
Côte d'Ivoire	391.31	104.77	36.20	0.00	0.00	5.78	0.00	0.00	0.00
Swaziland	10.91	3.90	0.00	0.00	0.00	0.00	14.79	0.00	0.00
Mozambique	–	–	0.00	58.14	0.00	0.00	0.00	0.00	0.00
Source: National stock exchange websites and direct sources from stock exchanges. Bloomberg (2008) for South Africa.

A major institutional failure in the majority of African markets is the lack of appropriate regulation. The different approaches to regulation were discussed above. However, in many countries financial market liberalisation was introduced at the same time as the infrastructure to increase participation and improve performance and these new institutions are either incomplete or have failed altogether. One example is the newly established Bolsa de Valores de Maputo in Mozambique, which has been hindered by the lack of appropriate trading facilities and is currently operating from the central bank (EIU, 2005). Institutional investors, which as noted above can be highly beneficial to emerging economies, are unlikely to consider markets in sub-Saharan Africa due to the settlement risks associated with small and undercapitalised local brokerage houses. This is exacerbated by the inability of local investment banks to underwrite domestic market share issues and IPOs, and liquidity and political risks are also major concerns (Kenny & Moss, 1998). Clearly, fund managers are wary. Since the demise of the Morgan Stanley Africa Investment Fund in 2002, in which only 15 per cent of funds were invested in sub-Saharan African equity markets outside South Africa in 1996, only two prominent Organization for Economic Cooperation and Development fund management companies offering African equity investment funds remain (TrustNet, 2006). These two fund managers, Old Mutual (Bermuda) and Lazard Brothers (Luxembourg), have country-specific funds focusing on South Africa and Egypt, respectively. Few fund managers outside Africa offer investment vehicles to access sub-Saharan African markets (TrustNet, 2006). Of these, African Alliance is the most prominent, with their portfolio diversified by placing a majority stake in South Africa and the rest in smaller local markets (African Alliance, 2006). This marginalisation of African markets in portfolio allocation decisions is examined in a World Bank report that notes that in 2003, excluding South Africa, sub-Saharan Africa attracted only US$500 million in foreign equity investment. This represented just 3.5 per cent of worldwide flows valued at US$14.3 billion (African Business, 2005). However, despite these statistics, several African countries are included in the Standard & Poor's Emerging Markets database and benchmark performance index (S&P, 2006a), and several of the smaller markets are reported in the Standard & Poors Frontier Markets database and index fund (S&P, 2006b).

4. The Swazi and Mozambique stock exchanges

4.1 History and development

4.1.1 Swaziland

The Swazi stock market was created in July 1990 by an ex-World Bank executive, Sibusiso Dlamini, with the intention of empowering the Swazi population by making them stakeholders in the economy. Standard Chartered Bank (now Nedbank (Swaziland) Ltd) was the first company to list, in July 1990, followed by Swazispa Holdings Ltd, a hotel and casino conglomerate, in March 1991. The third major listing in September 1992 was the Royal Swazi Sugar Corporation (RSSC). Secondary market trading in equities was in minimum lots of 100 shares. The first government bonds were traded in December 1990 and the first corporate debenture issued in December 1992 by Swaziland Brewers Ltd. These remain the only types of instruments in the Swazi market (Swaziland Stock Exchange, 2009).

The market initially had only one broker, Swaziland Stockbrokers, who effectively made the market from an office in the capital city, Mbabane. Trading took place on an order matching auction basis, and all clearing, settlement and brokerage took place in their office, with the broker taking responsibility for reporting market activity in The Times of Swaziland. The share index was a simple unweighted stock price index, which remained unchanged until the market was modernised in 2001, when it was replaced by a market capitalisation weighted index rebased at the close of each trading session.

In 1998, Swaziland Securities, an affiliate of the large regional brokerage firm African Alliance, established offices in the neighbouring city of Manzini. Trading became more formalised and took place between 10 am and 12 noon Monday to Friday, using an over-the-counter order matching system via telephone link between the two houses (Michael Matimela, Stockbroker, Swaziland Stockbrokers, personal communication, October 2007, Mbabane, Swaziland). A third participant, the brokerage and fund management company Interneuron (SA), established an office in Mbabane. Because the local affiliates of foreign banks lack sufficient capitalisation to act as guarantors and reduce settlements risk, collateral guarantees are acquired from foreign head offices. The market has become more G302 compliant since 1999 and settlement is now on a cycle of physical delivery of stock at T + 5, to attempt to harmonise within the SADC. Primary listings requirements are based on those at the Johannesburg Exchange and secondary market activity is now concentrated on promoting cross listings, such as the Masterfridge float in 1996.

In the absence of formal legalised regulations to provide monitoring and investor protection, in July 1999 the Central Bank of Swaziland inaugurated the market and provided exchange facilities. However, without the necessary regulation the Bank can exercise only limited control over the market under the amendment of the 1975 Financial Services (Consolidation) Act. Operations are directed by The Capital Market Development Unit, which provided a trading floor in an annex of the central bank, with trading conducted by call-over auction. The Unit is still responsible for market supervision and monitoring and also was involved in designing the amendment of the 1997 Securities Market Regulation bill, which has now been passed to parliament for formal ratification.

The Swazi Stock Exchange (SSX) has existed in its current form only since 1 September 2000 and now includes call-over trading facilities, an exchange website and the allocation of ISIN codes to all traded securities. When finally endorsed, the Securities Regulation bill will ensure a self-regulating marketplace based on English Common law, while investor protection and commercial law will be based on the Roman-Dutch legal code, reflecting that of South Africa.

4.1.2 Mozambique

The Bolsa de Valores de Maputo was established in 1999 with the joint assistance of the World Bank and the Lisbon Stock Exchange. Trading began on 14 October 1999 and the first listing was a short-term government treasury bill. The first company to meet the listings criteria was a joint venture between South African Breweries, SAB Miller, and the former state-owned Cervejas de Moçambique (Mozambique Online, 2006). However, owing to a fragile and undercapitalised domestic business environment and an expansive informal sector, few other companies have been able to meet the cost involved in the stringent listings criteria. Also, there is a lack of knowledge about internationally acceptable auditing and accounting techniques in the formal business sector that has only recently adopted auditing practices (Standard Bank, 2007).

Physical exchange facilities are provided in an annex of the Ministry of Finance, including settlement that takes place by the physical transfer of securities. The market is organised by four licensed brokers, dominated by South Africa's Standard Bank. Trading takes place by a remote accessed internet system where orders are submitted and await ultimate execution. Investor and exchange awareness is minimal, with the single listed equity effectively providing an additional asset for diversification in the small inter-bank brokerage market. With the exception of Standard Bank, brokers lack capitalisation to provide effective custodial facilities and market research is centred on occasional reports issued by Standard Bank. Not surprisingly, overseas and institutional investors are unwilling to participate in this market too. Formal trading hours are from 9 am to 12 noon on Tuesday, Thursday and Friday, with brokers entering orders into the internet-based system linked to the exchange itself. Matching, confirmation and physical settlement follow.

The operations and potential growth of this market are further hindered by a general lack of transparent enforcement of property rights, which rely on an inefficient court system and commercially inexperienced judiciary, and where corporate dispute resolution can take over 500 days (IMF, 2007). Mozambique is ranked poorly in terms of its legal environment, both regionally and internationally, which causes investors to exercise extreme caution (IMF, 2007). The issue of property rights is a serious concern to investors and has reduced Mozambique's ability to attract much needed foreign investment, both as foreign direct investment and as equity portfolio investment.

4.2 Structure and performance of the markets

Trading in Swaziland is by a call-over auction system, which is the most efficient method given the lack of liquidity in the market. Representatives of member firms meet daily on the trading floor and the call-over manager, as auctioneer, operates a price-scan auction where prices are selectively shouted out for each counter. The market for that counter is called at the agreed day's closing price when this matches the price the broker is prepared to accept. Call auctions are common for trading in infrequently traded stocks, in contrast to continuous order driven computerised trading systems where the bid–ask spread is representative of informational transactions costs in the market. Because of the effectiveness of call auctions in collecting all available information in the market, they are frequently used in the electronic trading systems of the largest world markets such as those of New York, Johannesburg and London. The market in Swaziland has effectively achieved the most efficient price discovery mechanism for stocks, which concentrates liquidity within the market calling structure, thereby removing the unwanted noise or volatility commonly found in continuous order driven markets (Schwartz, 2000). This is an improved and fundamentally different trading system from the telephone-order-driven over-the-counter market operated prior to 1 September 2000. Details of new equity and debt issues on the Swazi stock exchange since it was established in 1990 are given in Table 3. However, the exchange also acts as a secondary outlet for government loan stock outside of the auctions undertaken at the Central Bank, and while there were issues of longer maturity on the market between 1990 and 1995, post-1995 is characterised by frequent issues of very short-term and medium-term maturity instruments. These provide the exchange with an additional source of income through listings fees, although at the risk of crowding out the market owing to a lack of equity and corporate debt listings.

Table 3: Swazi stock market: new issues, 1990–2006

Date	Issuer	Instrument	Type	Market capitalisation (million SZL)
1990	Nedbank (Swaziland) Ltd	Equity	Flotation	42.22
	SEB Stock	SEB STOCK 05/07/2000 14.75%	Bond	15
1991	Swazispa Holdings Ltd	Equity	Flotation	31.48
1992	Royal Swazi Sugar Corporation Ltd	Equity	Flotation	255.32
1993	Swaziland Brewers Ltd	SWD BREWERS LTD 14.50% DEB 2002	Debenture	15.30
1994	Lonrho Sugar Corporation Ltd	Equity	Flotation	699.25
	Swaziland Posts and Telecommunications	SWD POSTS & TELCOMS 13.25% 2003	Debenture	16.64
	Swaziland Sugar Assets	SWD SUGAR ASSETS 13.50% DEB 2003	Debenture	12.82
1995	–	–	–	–
1996	Masterfridge Ltd	Equity	Flotation	207.41
	Swaziland Government Debt	SWD GOVT 15/11/2005 15.00%	Bond	30
1997	Lonrho Sugar Corporation Ltd	Equity	Rights	23.91
1998	Swaziland Property Investments Ltd	Equity	Flotation	63.94
	Nedbank (Swaziland) Ltd	Equity	Rights	8.26
1999	Newera Partners Ltd	Equity	Flotation	24
2000	–	–	–	–
2001	Royal Swazi Sugar Corporation Ltd	Equity	Rights	578.08
2002	–	–	–	–
2003	Standard Bank	STD BANK 15/09/2015 9.73%	Debenture	^a
	Swaziland Posts and Telecommunications	SWD POSTS & TELCOMS 15/10/2010 13.75%	Debenture	^a
2004	Swaziland Empowerment Ltd	Equity	Flotation	83.25
2005	–	–	–	–
2006	–	–	–	–
^aTotal capitalisation for both debentures of 174 million SZL (Swazi lilangeni).
Source: Compiled by authors from the Capital Markets Development Unit, Central Bank of Swaziland.

Perhaps of more importance is the information on ownership in Table 4. Initially, the ownership of government instruments was dominated by pension funds and development finance parastatals, which had a 92.2 per cent stake, with the remaining held by the commercial banks. However, by 1998 this had changed to bank holdings of 46.4 per cent (Central Bank of Swaziland, 1999). Swaziland's first corporate bond, Swaziland Electricity Board, started trading in 1990 with a nominal capitalisation of E15 million (US$5.67 million), followed by the three corporate debentures in 1993 and 1994. As can be seen in the table, the level of free floating shares, i.e. those that can be bought by individual shareholders, is around 10 per cent for the majority of issues. The shareholding characteristics of the Swazi listed companies reflect low levels of market activity, with ownership dominated by large domestic block holders, affiliated to royalty, such as Tibiyo Taka Ngwane. One exception is the most active stock, RSSC, which attracts a more diverse class of investors. Between 2001 and 2006 the most popular securities to be included in unit trust and pension portfolios were Newera Partners and Nedbank, which are considered locally to be reliable. Ownership of RSSC is more diverse, including a sizeable minority holding by Coca-Cola plc, in order to capture input supplies, and the Government of Nigeria. RSSC has been one of the more successful listings and a reasonable activity trading record indicates some degree of price efficiency. More recently, there are some indications that institutional shareholders, particularly the insurance and pension funds, have increased their minority stakes and this does give some cause for optimism about the future of the market.

Table 4: Swazi Stock Exchange listed companies: by owner, 2006

Company	Market capitalisation (SZL million)	Sector	Beneficial owners	Free float (%)^a
Nedbank Swaziland Ltd	71.58	Financial services	Nedbank (RSA)/Swazi Gvmt (Swz)	9.70
Swazispa Holdings Ltd	50.71	Retail and leisure	All Saints (Swz)/Tibiyo Taka Ngwane (Swz)	9.70
Royal Swaziland Sugar Corporation	944.19	Agriculture	Tibiyo Taka Ngwane (Swz)/Pan African Sugar Ltd (Mauritius)/Nigeria Gvmt (Nigeria)	21.00
Swaziland Property Investment Ltd	61.61	Property	Fosfin (RSA)/SIDC/Public Service Pension Fund (Swz)	21.40
Newera Partners Ltd	27.55	Private equity	African Alliance/Swaziland Provident Fund (Swz)/Unit Trust of Swaziland (Swz)	12.20
Swaziland Empowerment Ltd	94.35	Private equity infrastructure fund	Public Sector Pension Fund (Swz)/Newera Partners Ltd (Swz)	10.92
Masterfridge Ltd	25.07^b	Manufacturing	Suspended: January 2001^c (subsequently delisted)	–
^aNumber of shares publicly available May 2006.
^bPrior to share suspension in January 2001.
^cEffective at end of 2003.
Source: Compiled by authors from the Capital Markets Development Unit, Central Bank of Swaziland and Bloomberg (2008).

There is little to note about the performance of the Mozambique stock exchange. The sole equity is Cervejas de Moçambique, which is a joint venture between South African Breweries (SAB) and the Government of Mozambique, as shown in Table 5 . Mozambican society has a deeply conservative attitude to public information disclosure, and its business environment is dominated by small and medium-sized family firms who are reluctant to see ownership dispersed, as it is in equity finance. The combination of these factors has caused debt to be a preferential source of funding rather than equity (Bruno Tembe, Operations Manager, Bolsa de Valores de Maputo, Maputo, Mozambique, personal communication, 14 July 2008). While this debt has traditionally taken the form of relationship based finance provided by the banking sector, there have been some infrequent issues of securitised debt instruments through the stock exchange by larger companies such as Cervejas de Moçambique or the domestic telecommunications conglomerate MCEL. Consequently, in an effort to remain economically viable the exchange has acted as a secondary outlet for short-term government debt at the risk of crowding out the market.

Table 5: Shareholding of Cervejas de Moçambique through Bolsa de Valores de Maputo

Prelisting shareholders	Ownership (%)	Post-privatisation ownership structure (2001)	Ownership (%)	Ownership structure (2007)	Ownership (%)
South African Breweries (SAB)	70.00	South African Breweries (SAB)	70.00	SAB Miller	79.18
Government of Mozambique	30.00	Government of Mozambique	2.00	Government of Mozambique	1.78
		Employees	10.00	SPI	4.77
		Founding partners	5.00	Mozambique Investment Ltd	1.32
		Small subscribers	6.50	Employees	8.92
		Other	6.50	Other	4.03
		Public release (free float)	6.50	Public release (free float)	4.00
Source: Compiled by authors from Mozambique stock exchange, and Philip Duncan, Chief Financial Officer, South African Breweries/Cervejas de Moçambique, personal communication, 10 July 2008.

Table 6: Contrasting evolution of debt and equity markets in Mozambique

	Market capitalisation
	Debt		Equity	Debt/equity ratio
Year	Metical (million)	US$ (million)	US$ (million)
1999	5.82	4.50	–	–
2000	280.24	16.37	–	–
2001	2651.80	113.50	58.14	1.95
2002	2814.15	117.40	52.84	2.22
2003	2532.50	105.80	41.06	2.58
2004	2830.83	148.20	53.68	2.76
2005	5746.39	242.00	28.77	8.41
2006	7532.60	298.20	96.15	3.10
Source: Bruno Tembe, Operations Director, Bolsa de Valores de Maputo, Mozambique, personal communication, 8 July 2008.

The evolution of market capitalisation of listed debt as opposed to equity is shown in Table 6, where it is clear that listed debt dominates the equity market by a factor of three. Trading in this market is dominated by extreme illiquidity, with the time taken for a match to a bid or sell order submitted to market to be executed often being in excess of 21 days (Standard Bank, 2007). Compared to the practice in Swaziland, the system in Mozambique is a continuous order driven platform complete with bid–ask quoted spread. There is no provision for issues relating to illiquidity or informational transactions costs due to a thinly trading environment and there is therefore considerable uncertainty in the ability of prices to reflect all available information in the market within the bid–ask spread (Schwartz, 2000). This lack of both investors and issuers in Mozambique has made the exchange largely unviable, as the intended revenues from listings and trading fees and commissions are minimal. It is only through political influence exerted by the exchange, in its position within the Ministry of Finance, that has attracted an increasing number of listings of short-term government debt instruments, which has raised primary market fees, and subsequent order flow from the narrow secondary market that earns trading commissions. In a major effort to attract listings of small and medium-sized enterprise firms the exchange in Mozambique is creating a ‘Segundo Mercado’ or junior market. This offers relaxed listings requirements, including less rigorous disclosure, and only one year of annual audited reporting is required as opposed to the current two years, and a minimum of 5–10 per cent of shares is available to market as opposed to the current 50 per cent. The exchange concedes that it will take considerable time for a stock market culture to evolve in former socialist Mozambique, despite a growing public awareness campaign (personal communication, Tembe, 14 July 2008).

The small number of listings on both markets, together with the low free float capitalisation, is a deterrent to potential overseas foreign institutional investors, whose trades tend to be larger and thus require a greater market depth (Marone, 2003). If this could be reversed it would raise the profile of the exchanges and at the same time increase the level of domestic activity, but currently trading tends to be low volume and, in the case of Swaziland, concentrated in popular securities, such as Nedbank and RSSC. However, before this can happen, a rigorous regulatory structure needs to be in place, while at the same time ensuring an efficient primary and secondary market without adding to the cost of issue and compliance. This is a difficult balance to achieve, as these small markets cannot compete with South Africa. Table 7 highlights the inadequate performance of these markets by comparing them to South Africa. Links with this much larger and more successful market would be a major improvement, as shown by the experience of Namibia, which does have an integrated market with South Africa and has benefited substantially from this (Piesse & Hearn, 2002). However, these links could also be at a less binding level than full integration. For example, they could take the form of cross listings and memorandums of understanding where the smaller markets can gain from the substantial transfer of technology and regulatory experience from the Johannesburg Stock Exchange. Encouraging more informal links would also satisfy political concerns about a perceived loss of sovereignty and control over small domestic markets and the very valid concerns about liquidity migration and order flow to the larger market (Botswana Stock Exchange, 2008). To this effect, the exchange in Mozambique signed a cooperation protocol in 2002 with the Securities Commission of Portugal which is aimed at strengthening ties in terms of technical assistance and experience, with optimal regulation given the two countries' shared language, culture and legal system (Banco Central do Moçambique, 2000).

Table 7: Comparative stock market performance indicators, 1990–2006

Year	Number of firms listed	Market cap (US$ million)	Traded value (US$ million)
South Africa
Mean (1990–95)	671.67	209 870.48	11 613.33
Mean (1996–2000)	536.67	185 226.27	45 722.11
2001	542	146 017.70	49 984.41
2002	472	146 017.70	93 595.14
2003	426	269 156.60	147 625.30
2004	404	455 843.70	230 934.60
2005	388	566 972.30	238 808.20
2006	401	794 875.80	390 123.10
Namibia
Mean (1990–95)	11.75	109.76	19.93
Mean (1996–2000)	36.8	515.92	232.54
2001	37	150.51	167.41
2002	35	170.77	159.75
2003	35	307.76	306.74
2004	32	442.33	505.78
2005	28	414.94	532.34
2006	28	541.72	527.96
Mozambique
Mean (1990–95)	–	–	–
Mean (1996–2000)	–	–	–
2001	1	56.89	0.52
2002	1	51.76	38.01
2003	1	39.95	84.86
2004	1	51.85	23.27
2005	1	27.44	0.00
2006	1	95.50	0.03
Swaziland
Mean (1990–95)	3	187.46	0.53
Mean (1996–2000)	4.33	142.29	60.00
2001	6	128.42	3.13
2002	6	139.98	0.06
2003	6	174.07	0.02
2004	6	221.59	0.01
2005	6	197.09	0.01
2006	–	–	–
Source: Compiled by authors from national stock exchanges, the Capital Markets Development Unit, Central Bank of Swaziland, International Monetary Fund and World Bank International Finance Corporation statistics databases.

4.3 Supply of investment opportunities

The limited supply of new listings in both markets is largely a function of the size of companies in Mozambique and Swaziland. For the majority of small and medium-sized enterprises, bank credit is more accessible and costs significantly less than a stock market listing. But more important is the lack of a robust retail or institutional investor base.

Competition for the provision of funds is from the banking sector. Swaziland does have an efficiently managed commercial lending sector, despite being an oligopoly consisting of three private sector banks, South Africa's Nedbank, Standard Bank and First National Bank, plus the parastatal Swaziland Development and Savings Bank. There are also increasing levels of foreign direct investment, which account for most of the long-term project finance, although outward investment is also increasing. This is reported in Table 8.

Table 8: Sources of business and project finance in Swaziland (lilangeni millions, SZL), 2000–04

	SSX	Commercial bank lending to business	Foreign direct investment				Net balance of inward portfolio investment
		All maturities	Unlisted equity	Long-term capital	Short-term capital	Reimbursed profits	Equity	Debt
2000	24	996.16	510.20	693.40	891.00	1962.60	–0.60	–13.40
2001		956.32	837.40	850.10	653.50	1960.80	–1.00	–45.40
2002		1306.33	737.90	582.90	1215.60	2711.40	0.00	41.00
2003		1566.29	709.40	703.10	857.50	2517.20	0.00	–2.20
2004	83.3	2015.81	678.70	828.10	963.30	2753.60	4.40	–70.50
Note: SSX denotes Swazi Stock Exchange new flotation from listed companies.
Source: Compiled by authors from Central Bank of Swaziland Annual Report, 2005, and the Capital Markets Development Unit.

4.4 Demand for investment opportunities

A major barrier to the provision of funds to create an active financial sector in these small sub-Saharan African markets is that most of the population lacks disposable income. Given the poverty levels in both countries, savings rates as a proportion of GDP are low, even compared with South Africa.3 For example, in Mozambique savings have increased to overtake those of Swaziland, reflecting the dramatically changing business sector that has developed following the peace treaty in 1992 and the end of the civil war. But the problem remains that, given that 50 per cent of the rural population live on less than US$2 a day, savings are severely limited and many people consume all their disposable income. Relative savings rates for South Africa, Mozambique and Swaziland are shown in Table 9, Panel 1.

Table 9: Domestic savings and life expectancy in Swaziland, South Africa and Mozambique, 1992–2005

Country	1992	1990–94	1996–99	2000	2001	2002	2003	2004	2005
Panel 1: Domestic savings rate as proportion of GDP (%)
South Africa	–	20.31	18.21	18.51	18.55	19.62	18.57	–	–
Mozambique	–	−6.81	3.77	10.56	18.30	15.57	11.28	–	–
Swaziland	–	5.53	3.19	3.15	5.67	9.00	9.20	–	–
Panel 2: Life expectancy (years)
South Africa	62	58	55	49	46	47	45	45	46
Mozambique	–	44	–	43	–	42	–	–	42
Swaziland	58	–	–	60	60	51	34	34	31
Source: Compiled by authors from the World Bank Development Indicators Database (2005) and the UNCTAD (2006) Handbook of Statistics.

The potential to attract additional savings through the financial institutions in the form of pension funds is also severely limited owing to the effects of HIV/AIDS. The impact is particularly severe in Swaziland, with the life expectancy level now at 31 years and Mozambique slightly higher at 41 years (see Table 9, Panel 2). There is a serious shortfall of supply of savings to the local investment industries owing to both a lack of demand for formal pensions and incompleteness in terms of a shorter lifecycle of payments into the plans. This is mirrored in the local insurance industry, where additional premiums are incurred by plan holders to compensate for loss of funds and potential asymmetric information concerning health. There is a wider impact too from those infected with HIV/AIDS in terms of the economic impact on the household and extended family. Funeral costs and medical expenses reduce household incomes in already poor countries to a subsistence level where saving of any form is impossible (NEPRU, 2002). The continued lack of investment derived from minimal domestic savings, combined with the inability to make up this deficit by attracting foreign investment, suggests that the growth of these markets is unlikely to follow the patterns of developed economies, where the large institutional investor is able to ensure an active market by drawing on substantial domestic savings.

5. A comparison of Swaziland and Mozambique

It is clear from the previous sections that both Mozambique and Swaziland are very small markets that are highly inactive and therefore illiquid and in their present state will do little to improve the overall economic conditions of the majority of their citizens. The extremely high levels of illiquidity and costs of equity mean that investment in these markets is uncompetitive compared with saving opportunities in the banking sector, which offer considerably better risk-adjusted returns. Consequently, the markets fail to provide an adequate flow of investment through the economy to those industrial development projects that have the greatest potential for success. Equally, the level of inactivity inhibits the market's ability to monitor management within listed firms effectively and thus fails to ensure managerial efficiency. This section compares the economic and political features of these countries in order to emphasise that a single set of reforms may not be appropriate for all micro-markets.

The first major difference is that Swaziland, along with Lesotho, Namibia and South Africa, is a member of the CMA while Mozambique is not. This should provide numerous advantages to Swaziland, such as the ability to share in the macroeconomic climate with the other members and access to a common currency. Firstly, foreign exchange exposure can be eliminated and macroeconomic asymmetries dramatically reduced, which is a considerable benefit in a region that has experienced high levels of volatility in recent history. There is also the opportunity to transfer funds within the CMA without restriction, whether for current or capital account transactions, to or from any member country. Swaziland is considering imposing regulations requiring a minimum investment of funds by financial institutions in domestic securities or credits to local businesses or individuals but so far only Namibia has done this. Whether this will be implemented in future is unknown, but the small, less developed, CMA members are concerned that funds generated in their territories and deposited with local financial institutions tend to flow to the more developed capital market of South Africa. This is a not unreasonable fear given the performance of their domestic markets. A final advantage of CMA membership is that the terms and timing of such issues are subject to consultation and agreement with the South African Government, and have the same rating as South African municipal bonds (Wang et al., 2007). Swaziland also has access to the South African capital and money markets, but only through prescribed investments or approved securities that can be held by financial institutions in South Africa, in accordance with the shared prudential regulations. The timing of such issues is subject to consultation and agreement with the South African Government, and the issues have the same rating as South African municipal bonds. Swaziland therefore benefits from having a yield curve of up to 15 years in maturity despite lacking a formal credit rating. All of these advantages are unavailable to Mozambique as it is not part of the CMA. Moreover, there is little likelihood of Mozambique being in a position to join the CMA given that its approach to prudential regulation strictly follows the Portuguese civil code. Mozambique has recently gained a sovereign credit rating that has enabled the yield curve on government debt instruments to be extended from 63 days to 364 days (Banco Central do Moçambique, 2000). However, this still falls short of allowing the country to escape from a position of ‘original sin’, which is where a country is unable to either borrow abroad in its own currency or issue long-term securitised debt (Grandes & Pinaud, 2004).

The second significant difference flows from the political economy of these two countries. The Swazis have a strong culture of patronage to the crown and the population is generally homogeneous, whereas Mozambique has a much greater mix of cultures and a residual traditional reliance on public sector institutions. These political differences can help to explain why the markets behave in the way they do. The Swazi stock exchange is characterised by the ownership of many listed securities dominated by a complex network of institutions connected to royalty, with the state in effect maintaining control through the Swazi elite. This is very similar to the situation on the Francophone West Africa exchange where local elites become rentier capitalists (Lavelle, 2001). Mozambique, in contrast, has a very narrow and under-capitalised formal sector that is still recovering from the long civil war and the very recent transition from socialist central planning and ownership concentration is simply a function of the highly skewed wealth distribution. Thus, only a very few individuals are able to play an active role in the state privatisation programme. While neither situation is likely to result in an efficient and active market, the system of patronage associated with royalty may be seen as more benign than that of the former socialist transition government. Both impose very high local costs of equity and sizeable illiquidity premiums, which are highly unattractive to international institutional investors, but one is acceptable to a largely sympathetic population while the other is not.

6. Conclusion

This paper examines the Mozambique and Swaziland stock exchanges in the context of economic development and growth. It is timely given the renewed interest in smaller frontier emerging markets where there is considerable potential for both diversification and enhanced risk-adjusted returns on international equity portfolios. Equally, it comes at a time when many African countries have established small exchanges and are reviewing policy options, including regional integration, on how best to proceed with the development of nascent markets.

A comparison of these markets shows that they share many characteristics. They are small, illiquid and thus very unattractive to international institutional investors. The lack of an economically active population will not provide savings that can be used by financial intermediaries to enter the market and promote a viable capital market and this group is essential to promote the market expansion that exists in developed countries.

Market institutions are still very immature and despite Swaziland being more advanced than Mozambique both are at an insufficient level of development to benefit fully from regional integration initiatives. Consequently, it is likely take a long time before these markets are able to emulate the success of Namibia in exploiting the benefits of integration with larger and more successful markets in the SADC. Differences in the legal structure will have to be harmonised in the case of Mozambique, as well as adherence to international standards in regulation and wider resolution of macroeconomic management issues.

But the issues related to political economy are the biggest barriers to growth in both of these markets. Although there are differences in the substance, the overall effect is the same in that individuals wishing to participate in the market have no access and stakeholders are exclusively social elites. This two-country case study suggests that the motivation for the establishment of a formal stock exchange is not to increase efficiency and liquidity in the markets but to transfer ownership from the state while maintaining control by an unrepresentative elite. The findings suggest that listings are predominantly political in nature. This can explain the prolonged process of parliamentary ratification of a securities markets regulation bill in Swaziland: lack of political will. Both markets have much to gain through regional integration by exploiting economies of scope and scale, although a less binding alternative would be through signing memorandums of understanding and benefiting from the affiliation to a well-established regional hub market in terms of technology spillovers and reputation. Finally, the economic viability of the national investment industries would be seriously threatened if these countries imposed the domestic investment retention policy that is common to many sub-Saharan African countries. The challenges associated with making these markets viable are not likely to be overcome without a major policy initiative at both the national and regional levels.

Acknowledgements

The authors thank Keith Jefferis for valuable help and comments.

Notes

¹The CMA is based on the fixed peg between each country's nominal currency and the rand, and the Southern African Customs Union on the collective imposition of high customs tariffs on imports from outside its member countries.

²The Group of Thirty encourages standardisation and improvement in global securities administration. In 1989, the following recommendations were agreed on: (i) brokers should match trades on day after deal date (T + 1); (ii) trade confirmation on trade day plus two days (T + 2); (iii) central depository for safe keeping of shares; (iv) net basis settlement of cash and stock; (v) settlement takes place as delivery vs payment or receipt vs payment; (vi) settlement in same day funds; (vii) settlement effected on trade date plus three days (T + 3); (viii) securities lending should be permitted; (ix) international securities numbering system must be adopted (ISIN code).

³GDP per capita in 2005 = PPP US$4291 in Swaziland, PPP US$1105 in Mozambique and PPP US$9885 in South Africa (World Bank, 2008). (‘PPP’ refers to the assumption of purchasing power parity holding between the national currency and that of US$. GDP is thus expressed in constant prices and converted to US$.)