AN ESSAY ON BOLSTERING INVESTOR CONFIDENCE IN THIRD WORLD COUNTRIES
The following are examples of sources on bolstering Investor confidence.
THE signing of bilateral investment promotion and protection agreements (Bippas) is a sign that the host country is committed to attracting foreign direct investment (FDI), but there may still be a number of impediments which hinder the flow of FDI into a country. Zimbabwe has only six effective Bippas, five of them ratified 12 years ago, oldest with Germany, coming into effect in February 1996.
In 1998 Zimbabwe ratified Bippas with China, Denmark, and Namibia, Switzerland and Yugoslavia and more were signed after 2000 but they await ratification to have legal effect.
There is a three-stage process before a Bippa comes into effect. These steps include negotiation, signing of the agreement and finally is the ratification, which gives it legal effect.
Bippas are designed to encourage investor confidence by setting high standards of investor protection applicable in international law.
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Key elements which are usually contained in the agreements include provisions for equal and non-discriminatory treatment of investors and their investments, compensation for expropriation, transfer of capital and returns, and access to independent settlement of disputes.
Last year Zimbabwe signed a Bippa with South Africa which has raised a number of issues with one side seeing a lot of opportunities which would come with the signing. On the other hand, there are pessimists who question the commitment of the Zimbabwean government in protecting investments.
The skeptics have had their argument buttressed by the treatment of Nestlé Zimbabwe which was under threat from monetary authorities, indigenous businesspeople and political party activists who wanted the dairy processing company to accept milk from a company owned by First Lady Grace Mugabe.
Fearful of growing instability in South Africa, many foreign investors began to withdraw their money or to move it into short-term rather than long-term investments; as a result, the economy became increasingly sluggish. In order to cope with labor unrest and to boost investor confidence, the government decided in 1979 to allow black workers to establish unions as a necessary step toward industrial peace. This decision was a crucial step in the growing perception that apartheid would have to end. It undercut a basic ideological premise of apartheid, that blacks were not really full citizens of South Africa and, therefore, was not entitled to any official representation. It also implied an acceptance by employers, many of whom had called for the change in policy that in order for labor relations to operate effectively, disgruntled workers would have to be negotiated with, rather than subjected to arbitrary dismissal and police arrest, as in the past.
Successful consolidation of African countries in large regional economic blocs is now a reality
With such successful blocs as the Common Market of East and Southern Africa (COMESA), the Economic Community of West African States (ECOWAS) and the South African Development Community (SADC). As world markets operate more and more like "global villages," corporations Search relentlessly for investment opportunities with the lowest production cost, lowest cost of capital, highest investment returns and lowest risk both within and between these "villages" The consolidation of regional capital markets, combined with a coherent conducive investment environment, is imperative if African countries are to maintain a place at the table of the global economy.
Stock markets, in general, are about options. For savers, the stock market provides an alternative to the money currently placed with the local bank For entrepreneurs, governments or corporate bodies, the market provides a venue to raise capital to finance projects or businesses. For Africa to attract significant foreign direct investment, the stock markets will also be increasingly used as a platform by foreign investors to raise more capital to finance their projects.
Currently, there are twenty stock exchanges in Africa, which represents about a 40 per cent increase in market capitalization over the past five years-the increase rises to 160 per cent if the exchanges have outperformed most emerging and developed markets for the past ten years. This is in line with the increase in the overall level of foreign and direct investment and increases in the privatization of state-owned utilities, private sector investment and the overall level of investor confidence.
THE ROLES OF GOVERNMENT AND THE PRIVATE SECTOR
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The distribution of international capital is being conducted in a very discretionary way, leaving Africa on the sideline. Competition to attract foreign investment is intensifying as emerging stock exchanges adopt development strategies based on increased integration in the world markets. Thus, for the African markets to survive well into the next millennium, it is important that the respective governments in the region put in place sound fiscal and monetary policies. This should be accompanied by macro-economic reforms that will: bolster investor confidence, build a strong supervisory and regulatory infrastructure, help cultivate modern risk-management techniques within the private sector, put more emphasis on privatization, and help to open the economies to foreign participation with bold trade and financial sector liberalization to improve efficiency (Collier, 1997).
Many leading private institutions are strong players in their home market but are only small operators in the regional and global arena. Forming strategic alliances or expanding regional presence through mergers and acquisitions is a way to overcome this handicap. Businesses and financial institutions should create regional companies and services to expedite the process of the region's integration. Corporate sector reforms should involve the improvement of corporate disclosure and accounting standards to facilitate the move to a market-driven investment culture.
It is very important for the protection of individual investors that only stockbrokers who are licensed and regulated by particular stock exchanges are used to transact investment business. Such stockbrokers would also be conversant with current legislation and be able to advise investors accordingly. International Standard Securities are such a firm of stockbrokers.
Potential investors have to believe that relevant policy changes put in place regarding market regulations and the role of government will be adhered to. So far, most countries that have agreed to programmes have stuck to them. South Africa is proving to be a major success story, and this is now encouraging investors to look at other parts of Africa they may previously not have considered.
The World Bank anticipates that the economies of sub-Saharan Africa will grow at a rate of 3.9 per cent a year from now until 2003, boosted by inter-regional trade and a recovery in commodity prices. There is a strong body of opinion that believes that to get the best returns investors must get into African stocks as soon as possible and in markets other than South Africa. This is easier said than done. Apart from South Africa and Egypt, most of the exchanges have fewer than 50 quoted companies, with more than 80 per cent of each market's worth concentrated in its top 10 stocks. Most of those are the African subsidiaries of multinationals, such as Barclays, Unilever, Mobil and Standard Chartered. With the advent of universal Internet use, this is beginning to change. The lack of information has always proved a barrier to external investment for Africa and the Internet provides a window into the continent for external investors.
Possibilities now exist for the flotation of African companies in external markets, offering tremendous potential profit for investors. There are obvious pitfalls, but the risks have to be balanced against the possible rewards. Ghana has headed the pack with the flotation in the London markets of Ashanti Goldfields, in which the government had a 55 per cent stake and Lonrho the remainder. In the early 1980s, the mine had been run down to a fifth of current production because exchange controls had forced it to stop investing in new equipment. Since the mid-1980s the mine has been transformed, allowing the government to sell 27 per cent of the company for £1.1billion to help repay foreign debt.
However, a recent major forward exchange transaction, which went terribly wrong, cost the company millions of dollars. This is the other side of market liberalization. South African companies listed in foreign markets include Old Mutual and South African Breweries. M-Net, another South African company, will soon be listed on the Nigerian Stock Exchange. Further opportunities exist in the continuing privatization programme in Ghana. Morocco has state companies worth £2 billion earmarked for public listing. There are also active privatization programmes in Uganda.
Many countries, such as Zimbabwe, Ghana and Botswana, now allow foreigners to buy at least part of a company and to repatriate dividends. Others demand authorization before a foreigner can deal. Most African countries still don't have markets. There is plenty of scope for Africa to justify the perception of being the last great emerging market.
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In summary, the achievement of sustainable development in the African capital markets sector requires an increase in investment; in particular, foreign direct investment and micro-financing through venture capital. This will require both the maintenance of a stable macroeconomic environment and far-reaching improvements in governance. There will need to be discipline and transparency in the capital markets sector. The world is starting to rethink Africa's role in global markets. The challenge African stock exchanges will be facing in the years ahead is how to exploit the growing investor interest in their markets to create a virtuous cycle of growth. Secondly, the task for all African governments is to strengthen the institutional architecture of their economies to prevent capital flight and to minimize its consequences when it does take place. To effectively tackle these challenges, the management of the various African stock markets will have to:
- Persuade their respective governments to stop interfering with the market because it sends out the wrong signals when governments want to be market regulators and participants at the same time;
- Actively encourage investment in Africa. Africa needs to sell itself better to foreign investors;
- Help create markets in which it is easy to buy and sell securities and thus instill confidence in investors;
- Help reduce corruption and promote regional integration and stability. Africa is seen abroad as being endemically corrupt and war-torn. It does the market a lot of harm when corruption and regional conflicts are regarded as the two core African values;
- Help improve the legal framework. Securities laws have to be more effective and courts more impartial;
- Help create the conditions for venture capital instruments. Venture capital will go a long way to helping small- and medium-sized companies to raise capital; and
- Encourage new stock listings to improve investors' choices.
In general, African countries need to pursue policies that would allow them to efficiently tap into global financial market integration. It is logical to deduce that initial reactions to capital inflow will largely shape the patterns of future responses. African governments on their part will have to understand that:
- There is wisdom to curbing lending booms associated with capital inflows while redesigning the institutional structure of the financial system;
- It is wise to develop a well-functioning financial system to reduce the risks of potential instability as well as to attract global portfolio investment;
- developing countries need to build better shock absorbers and develop mechanisms to respond to instability because they will remain highly vulnerable to external shocks for quite some time; and
- International co-operation between regulators and adequate disclosure of information at all levels are increasingly important to ensuring safe and efficient markets.
ADVANCE UNEDITED COPY
- Porter, T. (1993). States, Markets and Regimes in Global Finance (Basingstoke: Macmillan Press).
- World Trade Organization (1996). Annual Report (Geneva: World Trade Organization).
- Bhattacharya, A., P.J. Montiel and S. Sharma (1997). "Private Capital Flows to Sub-Saharan Africa: An Overview of Trends & Determinants," (Washington, D.C.: World Bank/IMF), mimeo.
- Article by William H. Worger and Rita M. Byrnes; [chapter titles by NOP editor; editor notes in brackets, images and captions from various sources]