The Botswana share market and its role in financial and economic development

Pergamon

World Development, Vol. 23, No. 4, pp. 663-678, 1995 Elsevier Science Ltd

Printed in Great Britain 0305-750x/95 $9.50 + 0.00

0305-750X(94)00145-6

The Botswana Share Market and Its Role in Financial and Economic Development

KEITH JEFFEmIs* University of Botswana, Gaborone, Botswana

Summary. - Emerging stock markets are increasingly playing an important role in the financial sectors of developing countries. This paper examines the achievements of the Botswana Share Market, and finds that it has had a major impact on the portfolio composition of domestic institutional investors, reducing their incentive to invest offshore, but only a small impact on inflows of foreign investment. The paper con- cludes that the share market is unlikely to provide a suitable means of raising new finance for companies in the manufacturing sector, which have experienced the greatest problems in raising long-term finance and where the government’s economic diversification effort is concentrated.

1. INTRODUCTION

Increased emphasis on the importance of the finau- cial sector in economic development has stimulated the establishment of stock markets in many developing countries in recent years, often with the encour- agement of the World Bank and International Finance Corporation (IFC). Africa, however, especially south of the Sahara, has lagged behind other regions of the developing world in this process. This reflects the small size of many African economies, their underde- velopment, and perhaps the perception that share markets have little to offer at this juncture in Africa’s economic development process and that other issues-such as debt and structural adjustment- deserve greater priority. Nevertheless, share markets now exist in at least eight countries in sub-Saharan Africa, and are being considered in several more. A share market was established in Botswana in 1989, and although small it has grown rapidly since that time. This paper assesses the contribution of the Botswana Share Market (BSM) to the broader process of economic developing in Botswana, in particular to capital market development, and makes some sugges- tions as to how the contribution of the BSM may be further developed in future.

2. THE OBIECTIVES OF SECURITIES MARKET DEVELOPMENT’

The attention given to emerging markets and the enthusiasm shown by the IFC in promoting the establishment of share markets in developing countries is

part of a wider process focusing on the importance of the financial sector in leading economic development. This active role for the financial sector contrasts with earlier views that finance was essentially neutral and passive, a follower of developments in the real sector of the economy. The change can be located in the broader fmancial liberalization/tinancial deepening framework of market-led financial sector reform and development. Securities markets are themselves a key component of the capital market (the other being the nonsecurities segment comprising development and investment banks, pension funds, etc.) which is of crucial importance in encouraging savings and providing the long-term finance necessary for investment and economic growth. Their development can be seen as a relatively advanced stage of the financial development process, earlier stages of which include the monetization of economic activity as subsistence production and barter give way to commercial&ion, and subsequently the development of commercial banking as the main source of increased financial claims (Wai and Patrick, 1973, p. 276).

The role and impact of securities markets has perhaps not received as much academic attention as other elements of financial sector development, particularly in sub-Saharan Africa where bank-based financial systems predominate (Popiel, 1991). Nevertheless, a number of desirable objectives of securities markets development have been identified, along with some potential problems and factors which might constrain their growth and beneficial impact (Wai and Patrick,

* Final revision accepted: October 19, 1994.

663

664 WORLD DEVELOPMENT

1973; Drake, 1977 and 1985; Samuels and Yacout, 1981; Kitchen, 1986 and 1987). These objectives are summarized below:

(a) Providing a new source ofjnance for private corporate investment, especially in African countries where the financial sector is often narrowly based and dominated by commercial banks. Indeed, the impact of securities markets is typically assessed primarily in terms of the raising of finance for new investment. Many African banking systems follow the UK or US model, and are often reluctant to engage in long-term lending to finance corporate investment, or to provide equity capital; securities markets can help to address this deficiency.

(b) Improving companies’ gearing ratios and thus reducing financial risk; without equity markets gearing ratios in less-developed countries (LDCs) are often excessive (Kitchen, 1986; Samuels and Theobald, 1989). This helps the management of risk in individual enterprises (Roe, 1991).

(c) Improving the e#kiency of investment by allocating finance to more efficient investors, especially when market allocation replaces administrative allocation of financial resources. Securities markets can provide a hierarchy of rates of return (and therefore of the cost of capital) and hence lead to a better pricing of risk. This is particularly important in the context of financial repression and administered interest rates, where the cost of borrowing is not related either to the demand for capital or the riskiness of investments (Kitchen, 1986). More generally, the development of organized capital markets should mark an improvement on unorganized markets as a method of allocating resources.

(d) Improving the level of saving. The issuing of stocks and bonds should enable the allocation of savings to more efficient investors, thereby raising the returns to savers and stimulating the rate of saving. It should be noted however, that when real interest rates are raised as part of financial liberalization programs, there is only limited empirical evidence supporting an increase in savings; more likely is a change in the form of savings from nonfinancial to financial assets (Fry, 1988; Killick, 1993).

(e) Provision of an alternative capital market and hence competition to the traditionally dominant commercial banking sector, which is itself often either government controlled or oligopolistic, operating as a cartel. In both cases an equity market can provide competition for both savings and the users of finance, putting pressure on banks to improve both

interest rates and loan maturities (Kitchen, 1987).

(f) Benefits for institutional savers. Institutions such as pension funds and insurance companies are recipients of increasingly large amounts of long-term savings, and yet their investments are often dominated by govemment securities (often offering low returns) and property. Enabling institutional savers to buy equities and corporate bonds facilitates more balanced portfolios, improved earnings capacity (due to the higher expected returns on equities), reduced risk and greater financial stability (portfolio diversification benefits). There may even be a foreign exchange gain if funds invested in offshore equities are repatri- ated. Given that these institutions may well be the largest single repository for long-term savings, equity markets provide a channel for matching these savings to long-term investment needs.

(g) Foreign exchange gains resulting from the inflow of funds from overseas portfolio investors. This is increasingly important as developed country funds seek a wider range of investment outlets, attracted by the high yields that emerging markets have frequently offered, as well as the risk-reduction benefits of diversification2. Portfolio investment flows have increased dramatically since 1989, the “have recently been the fastest growing form of external finance for developing countries, accounting for one fifth of all capital flows to the developing world” (Finance and Development, March 1993, p. 9).

(h) Zndigenization of ownership. Stock markets may enable local investors to buy ownership shares in local subsidiaries of multinationals (see, e.g., Samuels and Yacout, 1981, on Nigeria; Calamanti, 1980 on C6te d’Ivoire, and Kitchen, 1987 on Jamaica).

(i) Privatization, which-along with the need to attract foreign investment-has received greater attention than indigenization during 1980s and 1990s. Although privatization has primarily been pursued as a means of improving economic efficiency in public enterprises, a secondary objective has been that of capital market development. The sale of govemment- owned equity in a privatization program has been seen as one way in which the capital market may be effectively “kick-started into action (Adam, Cavendish and Mistry, 1992, p. 23). Furthermore, privatization is easier to implement and more effective at wider partic- ipation in the ownership of privatized enterprises if an effective capital market is in existence.

BOTSWANA SHARE MARKET 665

(i) Improved standards ofjinancial reporting and discipline as well as managerial accountability and incentives. Obtaining a listing on a share market usually involves meeting certain mini- mum standards of disclosure, including at least the publication of annual accounts. In addition to potentially contributing to better accounting standards, this improves the ability to monitor corporate performance, as private companies may not be required to disclose their accounts beyond a narrow circle of shareholders and government regulators. Managerial performance incentives are improved through accountability to a wider range of shareholders and wider public scrutiny.

Despite these potential benefits from securities markets development, the few writers on the subject offer mixed conclusions as to the desirability of the policy as a contributor to financial and economic development. Much of this stems from differences not so much in the theoretical analysis but from assess- ments of the practical aspects of securities markets development. Muted support for stock markets is offered by Wai and Patrick (1973) and Samuels and Yacout (198 1). Calamanti is pessimistic, considering that a securities market:

may seriously jeopardize the growth and stability of a country’s financial structure, may introduce factors which tend to aggravate, if not originate economic fluc- tuations, and may adversely affect the allocation of savings, reallocation of existing real wealth, redistribution of income and the conduct of monetary policy. The importance of these factors and the likelihood of their occurring is such as to lead one to take an attitude which is in prin- ciple contrary to the establishment of securities markets in LDCs as a whole (1983, p. 89, quoted in Drake, 1985).

Drake, however, is enthusiastic, taking an “opti- mistic view of the role which a securities market might play in expediting economic development” (1985, p. 5). He suggests that Calamanti’s pessimistic conclusions might stem from the focus on less successful developing economies in Africa, in contrast to economies in South East Asia. Drake’s (1986) focus on the Pacific region leads him to conclude that LDC equity markets can be successful in the context of general financial liberalization and limited government intervention. This must be countered however, by Drake’s own findings that many of the markets dis- cussed have been characterized by limited raising of new capital, excessive volatility, insider trading, and an atmosphere of speculation and gambling rather than a serious means of financing development. Indeed, although many of the Asian countries which Drake considers have experienced rapid economic growth, there is little evidence that stock markets have made a significant contribution to this. In South

Korea, for instance, enterprises have relied almost entirely on debt finance for expansion, and have grown extremely rapidly (IFC, 1992). Finally, Kitchen is:

substantially in favor of encouraging stock markets in developing countries . . . [although] they are unlikely to be a panacea for solving the problems of savings mobilization, investment and growth which developing countries face their most favorable impact may be in the liberalization of capital markets, in that they present alternative choices for institutions, savers and firms faced with repressed interest rates and banking cartels in most countries any addition to the supply of scarce, long term capital, especially equity, is most welcome” ( 1986, pp. 149, 159).

3. STOCK EXCHANGES IN SUB-SAHARAN AFRICA

Over the past decade the international financial system has undergone rapid growth with the bulk of the expansion accounted for by new issues of intema- tional bonds. The financial systems of developing countries expanded much faster than those of developed countries, but in both, securities markets grew much more rapidly than banking systems (see Table 1). The record for Africa is, however, quite different. First, the expansion of financial systems in Africa was much slower than in LDCs as a whole. Second, African banking systems remain dominant, and have grown faster than African securities markets.

The IFC recorded 65 stock markets worldwide in 1992 (IFC, 1993); of these, 42 were classified as “emerging markets.” They therefore outnumber the “developed markets,” although the latter are much larger and dominate global stock market activity; the emerging markets accounted for only 7% of global stock market capitalization in 1992. The developed/emerging market split mirrors closely, but not exactly, the developed/developing country divide. The majority of emerging markets are in LDCs,

although the classification also includes markets in

Table 1. Growth of the internationalfinancial system 1982-91

lndustrialized Developing Africa countries countries

Banking system* +8.1% +44.3% +18.1% Stock markets +34.0% +94.0% +7.0%

* Money and quasi-money. Sources: Banking system-International Financial

Statistics (IMF) Stockmarket-IFC Emerging Stockmarkets Yearbook, 1992, Adapted from Clarke (1992)


Portugal and Greece, as well as Eastern European countries. Similarly, most “developed” markets are in the industrialized countries, although this classification includes markets in Singapore, Hong Kong and South Africa, which on some definitions might be classed as developing. Gfthe emerging markets, 10 were in Africa, 11 in Asia, 12 in Latin America and the Caribbean, and nine in Europe and the Middle East. Those in Africa are particularly small: average (median) market capitalization was only $0.5 billion, compared to $18 billion for Asia, $4.7 billion for Latin America and the Caribbean, and $1.2 billion for Europe and the Middle East. The two most prominent African stock markets-Nigeria and Zimbabw+feature in the IFC’s Composite Index of 20 key emerging markets, but are the two smallest markets in the index, both with capitalizations of less than $2 billion. It should be noted, however, that South Africa is not included as an emerging market. It dwarfs all others in Africa, with a capitalization of $15 1 billion. Two new markets have recently been established in Africa, in Swaziland and Namibia, while Zambia is about to follow suit.

African stock exchanges are characterized by limited trading activity. Samuels and Yacout (1981) note that the Nigerian Stock Exchange is “a very small, narrow market.” It is dominated by trading in government securities, accounting for over 90% of the total value of transactions, reflecting the fact that an important moti- vating factor in the establishment of stock markets in Africa-especially in Nigeria and Kenya-was the financing of government deficits. As a result, “the new funds raised on the market for the private sector, as a proportion of GDP, are low being in each year less than l%.” It has been important, however, in mobilizing and channeling savings, and in achieving the indigenization of ownership. Low levels of liquidity also characterize markets in Kenya and C&e d’Ivoire, and even in Zimbabwe, the most active market, turnover as a pro portion of capitalization surpassed 5% in only one year during 1985-91? Moreover, apart from Zimbabwe, the markets are small in relation to the size of the economy, with capitalization well under 10% of GDP (see Table 2).

4. BOTSWANA: ECONOMIC AND FINANCIAL DEVELGPMENTAL ISSUES

The ability of a share market to contribute positively to development depends upon the specilic issues con- fronting an economy at a particular time. The Botswana economy is in many ways an unusual one, and develop ment issues are not entirely typical of those facing other LDCs. Some of the generalizations relating to the role of share markets may not therefore be applicable.

The past two decades have been a period of rapid eco nomic growth, with Botswana one of the fastest growing economies in the world4 on the basis of the establishment and expansion of diamond exports; by the late 1980s Botswana was (by value) the second largest producer of diamonds in the world. Botswana is now classified by the World Bank as an upper-middle income country, with a GNP per capita in 1992 of US$2790 (World Bank, 1994). Besides contributing to rising income levels, diamonds have also produced massive revenues for government through taxation, royalties, and dividend income. Government therefore became a major economic agent, through its high levels of recur- rent and development spending, which totalled over 40% of GDP by 1990. It is also the largest financial intermediary through its accumulation of savings via budget surpluses and its lending to parastatals through its Public Debt Service Fund (PDSF), and also by borrowing from international financial institutions such as the World Bank and onlending to parastatals.

Although diamond reserves are substantial it is considered unlikely that production will grow significantly and therefore the sector will be unable to lead economic growth as it has in the past. The central economic policy issue to be addressed during the 1990s and beyond is the need for diversification away from diamonds toward other sources of growth (Republic of Botswana, 1991). Being a small open economy, such growth must be export-led. The current emphasis is on developing the manufacturing sector, but with a role also to be played by potentially exportable servivces such as tourism and regional financial, business and transport services.

Table 2. African stock exchanges-selected data

Nigeria Zimbabwe C&e d’Ivoire

Kenya Botswana

GDP $million 1991 29061 5699 8468 8261 2530

Market capitalization $million 1992 1243 628 331 607 291 Market cap./GDP % 1991 6.5% 24.5% 6.7% 7.7% 10.4%

Trading value (annual) $million 1992 23 20 4 12 15 Turnover ratio (liquidity) % 1992 1.8% 2.0% 1.0% 2.0% 3.1%

Number of stocks 1992 153 62 24 57 11

Sources: IFC, Stockbrokers Botswana Ltd.


Besides a changing economic structure, diversification also involves a shift away from the alliance between government and mining multinationals toward a broader range of smaller and medium-sized private sector companies as leaders of economic growth,

A number of constraints need to be addressed in order to facilitate this process, including low skills and productivity levels, high utility costs and a lack of local raw materials. In addition, the operation of the financial sector has frequently been cited as a constraint, focusing on two related issues, a perceived lack of long-term finance, particularly for manufacturing operations and for citizen-controlled firms, and more generally the comparatively underdeveloped state of the financial system. The financial system has lagged behind the country’s rapid economic growth, with virtually no money or capital markets, and a limited range of financial instruments and institutions (Republic of Botswana, 1991; World Bank, 1989, 1993b; BOCCIM, 1992).

The Botswana financial sector has long been dominated by oligopolistic commercial banks (Barclays and Standard Chartered), which were very conserva- tive and although sound and profitable, have not offered much in the way of resources to finance long- term investment. Furthermore there is a limited range of financial instruments, so that “capital markets for equities, long- and short-term debt instruments are absent, with consequent adverse implications for long-term finance and the distribution of risk-bearing . in the long run this is a serious weakness” (World

Bank, 1989, p. 48). An important point to note in the context of the Botswana economy is that the securities segment of the capital market is particularly under developed because the government has had no need to borrow, and has therefore not issued any securities (with the exception of a small issue of Treasury Bills in the 1970s). In contrast to most other countries therefore, there is not even a market in government bonds, the lack of which has inhibited the development of portfolio management expertise among financial institutions, nor has there been (until recently) any mechanism for the market determination of yields. Financial resources to fund long-term investment in much of the private sector have been particularly limited, and the issue recurs as a constant theme in dis- cussions of constraints on investment and economic growth (Harvey, 1985; Bank of Botswana, 1988; BOCCIM, 1992). Parastatals have been able to borrow long term from the government (through the PDSF) on relatively favorable terms, while the larger private companies (such as those in the mining industry), most of which are wholly or partially foreign owned, have been able to raise longer term finance offshore. The Botswana Development Corporation (BDC-a government-owned development finance institution) has provided equity and long-term loan

finance-on broadly commercial terms-in its joint ventures with several smaller and medium sized companies. The majority of such companies however, especially those which are locally owned, are reliant upon the commercial banks. As noted above, the banks have earned high profits, on the basis of relatively low-risk but highly profitable business such as foreign exchange transactions. The oligopolistic structure of the banking system and associated high profits have given little incentive to competition or innovation, and certainly in the past the banks have shown little inclination to develop new sources of business. As a result they have tended to be highly risk-averse, and lacking in the expertise to properly assess long-term investment proposals. This does not mean however, that all of the blame for the lack of long-term finance lies with the banks; there is some validity in their pointing to a shortage of equity con- tributions from project promoters, badly formulated borrowing proposals, and a real shortage of viable pro- jects, especially in the manufacturing sector.

In recent years it appears that the situation has been changing, following the adoption of a financial sector development policy by the government (see below) which led to the establishment of three new commercial banks during 1990-92, and hence greater competition. There appears to be a greater willingness to consider long-term lending and make appraisals on the basis of repayment ability rather than available collateral, and there has been a significant shift in the maturity structure of commercial bank lending, with 12.5% of advances having a maturity of over five years in 1992, compared to 7.5% in 1990.

A further important financial issue relates to the mobilization of savings. Although at present savings are very high (in common with many other mineral rich economies Botswana has surpluses of both domestic savings and foreign exchange), most of these are generated by the government. Private savings, especially from the household sector, are low and this presents a potentially serious long-term problem given that the government budget is forecast to move into deficit from 1995 onward and thus cannot be relied upon to provide the bulk of savings as it has done in the past (Bank of Botswana, 1989; Barclays Botswana, 1993).

A number of policy initiatives are under way to address the diversification and financial sector development issues. With respect to industrial diversification, a recent World Bank report (World Bank, 1993b) on the issue is currently being considered by the government with a view to introducing a revised industrial policy. A financial sector policy was introduced following an earlier World Bank report (World Bank, 1989), consisting of the following measures:

-licensing of more commercial banks to promote competition in the banking sector;

-raising interest rates to reach positive real levels


to encourage private savings and discourage borrowing for consumption purposes;

-capital and money market development. A recent initiative has involved the issuing of short- term bills, in the form of Bank of Botswana Certificates (BOBCs). This is solely to stimulate the establishment of a money market, including the market determination of interest rates, as the government remains a substantial net saver and does not (yet) need to borrow;

-the establishment of the Botswana Share Market (BSM).

Establishing a share market is related to a number of specific objectives. First, the policy aimed to fill a gap in the commercial-bank dominated financial system, and improve the availability of long-term finance. Second, it was hoped that the existence of a market for corporate equities would encourage companies to make greater use of equity finance, thus contributing to improved gearing ratios and lower financial risk. Third, it addressed the mobilization of private savings. By providing a financial asset offering good returns for relatively low risk, it was hoped that the share market would encourage a shift in the form of savings away from property and cattle into financial assets. It was also hoped that increasing the supply of domestic equities would improve the performance of the long-term contractual savings institutions, and encourage greater private use of pension funds, etc. Finally, the share market would provide a vehicle for some indigenization of ownership, if foreign companies could be persuaded to list their local subsidiaries, as well as for the sale of shares in government-owned companies.

It is worth noting that the establishment of the share market in Botswana differs significantly from the process in other African countries (Takirambudde, 1993); there is no Structural Adjustment Program, so the country is not under pressure to reform and or pri- vatize parastatals; there is no promotion of compul- sory indigenization; nor is there any need to finance public sector deficits. Instead, the policy is being undertaken from a position of relative economic strength to ensure that the financial sector can play the necessary role in the diversification of the economy.

5. THE BOTSWANA SHARE MARKET

The BSM was established in June 1989 and initially listed five stocks. Although five companies had made public share issues during the 198Os, no formal trading mechanism existed and shareholders wishing to buy or sell shares had used informal contacts or adver- tisements in local newspapers. The BSM consists of a single broker, Stockbrokers Botswana Ltd. (SBL), established as a joint venture between the Botswana Development Corporation, Edwards 8z

Co., a Zimbabwean stockbroking firm, and two commercial banks, Barclays and Standard CharterecL5

Since its establishment the BSM has developed significantly, although it remains small. There have been six new flotations, taking the total number of stocks to 11, as well as three rights issues. All of the listed stocks are ordinary shares; no preference shares have been issued, and although the brokers did participate in one corporate bond issue, this is not quoted or actively traded on the BSM. SBL also trades in Bank of Botswana Certificates (BOBCs).

(a) Performance of the BSM

The BSM index embraces all of the listed shares, weighted according to market capitalization. The first two years of the BSM’s operation were a period of rapid growth, marked by rising prices and a general shortage of stock, Figure 1 shows the performance of the index from June 1989 to mid-1993. In its first six months the index rose from 100.0 to 149.3, an amm- alized growth rate of 83%. This continued during 1990, with growth of 54% and the index reaching 230.5 by the end of the year. There were a number of reasons for this rapid increase in share prices.

-the lack of a formal market prior to mid-1989 led to the underpricing of stock. The establishment of the BSM led to increased liquidity and hence enhanced share values. This was reinforced by improved availability of information; SBL pub- lishes weekly bulletins which include details of prices, turnover, dividends and the usual stock market data, as well as updates on the performance of individual companies;

-it seems that several of the subsequent issues were underpriced, partly as a deliberate means of ensuring the success of new issues, but also because of a lack of experience in pricing shares in a new market. Five of the six flotations since 1989 have been oversubscribed, some of them heavily so. As a result prices of most newly issued stocks have increased substantially after listing;

--even with a flow of new flotations and rights issues, the first two years in particular were marked by significant shortages of stock relative to demand. The local institutions, in particular the two insurance companies deal-

ing with long-term business, and pension funds, needed equities in their portfolios which were at that time heavily dominated by property investments. At the end of 1988, prior to the establishment of the BSM, the three major institutions (two insurance companies and one pension fund) held P12.2 million in shares of the five companies which were later listed; three years later, at the end of 199 1, their holdings of listed equi-


ties had risen to P72.3 million, an increase of ment away from shares and toward fixed interest 500%; instruments;

-the general shortage of stock and rising prices tended to create a virtuous circle: as savers witnessed the substantial capital gains made by shareholders (over 100% in the first 18 months) this encouraged further demand through portfolio adjustment and hence further upward pressure on prices.

-the general slowdown in economic growth in 1991 and 1992 led to reduced profits and profit expectations. This corresponds with results from other developing countries that real equity prices are influenced by the economic growth rate (Gelb, 1989).

Growth in the index was much slower in 199 1 and 1992, however, at 17.9% and 0.8% respectively. In 1992, for the first time, a shareholder with a portfolio reflecting the market index would have experienced capital gains of less than 1% and dividend income of around 6%. yielding a substantial negative real return given Botswana’s 1992 inflation rate of 16.5%. Again, there are a number of causes:

(b) Characteristics of listed companies and structure of shareholdings

-an improved balance of supply and demand. Whereas in 1989 and 1990 new issues were worth around P12m a year, this jumped to over P25 million in 1991 and 1992. Given that the three major institutions were adding around P22 million of listed equities to their portfolios each year from 1990-92, there was less of a shortage of stock and hence less upward pressure on prices.

-rising share prices leading to falling yields; -this was reinforced by the government’s policy

of pursuing higher nominal interest rates (interest paid on 12-month deposits rose from 6.5% to 14.0% during 1989-92) which made fixed deposits and money market instruments more attractive, and hence led to a portfolio readjust-

Details of the 11 companies currently listed on the BSM are shown in Table 3. The financial sector dominates, with five companies, followed by trade with four. Six have clearly identifiable foreign controlling interests, two in the UK (Barclays and Standard Chartered), three in South Africa (IGI, Pep and Engen), and one in Switzerland (RDC). Two have local controlling interests (Sefalana and IWO), whilst two (BIHL and Sechaba) have reasonably dispersed shareholdings where no one party has majority control, although in both cases BDC has effective control with a minority shareholding. Of total market capitalization of some P650 million, around 50% is directly in the hands of foreign parents. Of the remainder, informal estimates by the staff of Stockbrokers Botswana indicate that approximately 40% (P250 million) is owned by local institutions and other major shareholders such as the Botswana Development Corporation. Around PlO million has been invested by foreign institutional (portfolio) investors, leaving

Table 3. BSM listed companies

Company Market capitalization

P mn*

Main business Economic sector Beneficial owners7

Barclays 144.9 BIHL 36.7

Engen 35.1

Financial Services Co. 28.8 IGI 30.45 Into 5.6 Pep 70.2 RDC 24.1 Sechaba 68.9 Sefalana 88.0 Standard Chartered 121.0

Commercial bank Insurance

Fuel distribution, property

Leasing, HP Insurance Distribution, security Retail Property Investment Trust Milling, wholesaling Commercial bank

Financial services Financial services

Trade

Financial services Financial services Trade Trade Property

Trade Financial services

Barclays PLC (UK) St Paul (USA)ILocal

-BDCf Gencor (SA)

Local-BDC/NDB$ IGI (SA) LoCal$ Pep (SA) Swiss Local-BDC$ Local-BDCS Standard Chartered PLC

(UK)

* As at 30th June 1993. t BDC- Botswana Development Corporation. NDB - National Development Bank (parastatals). $ These companies have no majority controlling interest. Major minority interests are shown. 8 Sale of IO1 South Africa’s stake is currently under negotiation. Source: Stockbrokers Botswana Ltd.


some P50 million of shares (7.5%) in the hands of the Botswana public.

(c) Trading volume, capitalization and liquidity

Market capitalization increased from P119.5 million ($136 mn) on opening to P657.2 million ($291 mn) at the end of 1992, an average annual rate of increase in local currency terms of 55%. This increase is due to both new issues and to the substantial increase in the value of quoted stocks. Nevertheless the market remains much smaller than the more established African stock exchanges whether measured by capitalization or the number of stocks quoted (see Table 4). This is partly due however, to the small size of the Botswana economy, and when measured relative to the size of the economy as a whole (capitalization/GDP) then the BSM is larger than stock markets in Nigeria, Kenya and C&e d’Ivoire. The comparison with other African exchanges also looks better when trading volumes and liquidity are considered. Turnover has increased steadily, from an average of PO.5 million per month in 1989 to PO.64 million in 1990, P1.42 million in 1991 and P2.66 million in 1992; by 1991 the BSM’s turnover exceeded that of the much larger Kenya Stock Exchange. The-liquidity

(turnover/market capitalization) of the BSM has also been improving rapidly: in its early years-when buy- ers were tending to hold onto stocks once purchased- was marked by the low levels of liquidity typical of LDC, and particularly African, stock exchanges. Liquidity however, increased from 1.9% in 1989 to 5.3% in 1992; by 1992 the BSM was already more liquid than stock markets in Nigeria, C&e d’Ivoire, Kenya, and Zimbabwe.

(d) Government policy

The government has been supportive of the development of the stock market, being indirectly instru- mental in its establishment, though the parastatal Botswana Development Corporation, Official policy is expressed in the current National Development Plan (NDlV

[There will be] extension of the capability of the stock exchange to serve as a vehicle for channeling savings into productive investments. This will require stimulation of an ample supply of, and demand for, both debt aad equity securities . . . the larger domestic companies will be encouraged to seek listings on the stock exchange, and efforts will be made to induce foreign companies to list their local subsidiaries as well. Also, consideration will

Table 4. Botswana share market: summary data

As at end of: 1989 Dee

1990 1991 1992 1993 DW DeC DK Jun

Stocks quoted Market index* US$ Index*? Real Index** Capitalization (Pmn) Capitalization (US$mn) Time & Savings deposits8 Mkt cap/T&SD Exchange rate (USW)

Average for period:

6 149.3 170.6 142.4 255.1 136.2 456.4

55.9% 0.534

1989 1990 1991 1992 1993 (June-Dee) (Jan-Dee) (Jan-Dee) (Jan-D=) (Jan-Jun)

7 9 11 11 230.5 271.7 273.9 270.0 263.5 280.5 259.7 235.7 196.2 205.5 177.8 163.4 423.6 545.4 657.2 647.9 226.4 263.2 291.2 264.3 600.9 1083.8 1267.0 1313.1

70.5% 50.3% 51.9% 49.3% 0.534 0.483 0.443 0.408

Growth (a) Growth (US$ index) Real index growth (%) Turnover (Pm Liquidity (%) II

monthly)

Inflation

82.774 54.3% 17.9% 0.8% -2.9%q 126.8w 54.4% 6.4% -7.4% -17.6%q 68.2m 37.8% 4.7% -13.5% -15.5%q

0.502 0.644 1.424 2.655 1.053 1.9% 2.3% 3.5% 5.3% 2.0%

11.3% _ 12.0% 12.6% 16.5% 13.6%

*June 19,1989 = 100 t Market index adjusted for P/$ exchange rate. June 19, 1989 = 100 $ BSM in&x adjusted for inflation. June 19.1989 = 100 8 Commercial banks

R

Annualized Turnover as % of average capitalization.

Sources: Stockbrokers Botswana Ltd.; Bank of Botswana


PllWl 12 -

lmm I-C -4s

. ‘. 10 -

(.’ @@--mm

200

150

100

50

I:[.. .*1:I l.lV I,I. I.1

a2 CM 01 a2 03 Q4 a1 a2 03 a4 a1 Q2 03 a4 01 Q2 00 91 92 93

Figure 1. Botswana Share Market index and turnover.

be given to possibilities for privatization of ownership shares in some parastatal enterprises, and for public offerings of shares in companies presently largely financed by government (Republic of Botswana, 1991, p. 149).

Since 1989 two significant tax change? have taken place to encourage the public issue of shares: in 1991 capital gains tax was abolished on publicly quoted shares, and listed companies which had at least 25% of their issued shares in the hands of noncontrolliug interests were granted the concession of a reduced company tax rate (35% instead of the normal 40%) for a period of five years. The latter move encouraged a number of rights issues in 1991 and 1992, where parent companies did not take up their rights in order to boost the proportion of shares held by the public. No personal income tax is payable on dividend income.6 Furthermore, in 1992, changes were made to the foreign exchange regulations which relaxed restrictions on foreign shareholdings, allowing up to 40% of the “free? share capital (not in the hands of controlling parent companies) to be held by overseas portfolio investors.

A Stock Exchange Act is currently being considered by parliament; the Act is modeled on legislation in force in Zimbabwe. This will provide the mecha- nisms for the establishment of a formal stock exchange, and also makes provision for regulation. At present the BSM is subject to the supervision of an interim stock exchange committee, comprising repre- sentatives of the private sector and government.

6. IMPACT OF THE BSM

(a) The BSM as a source of newjnance

Details of new finance raised on the BSM are shown in Table 5, and compared with other sources of finance in Table 6. It can be seen that although the amounts raised on the BSM are significant relative to long-term lending by the commercial banks, these two sources are small compared to both public sector sources and private overseas finance; in 1992, for instance, new capital raised on the BSM totaled P28.7 million, net long-term lending by the commercial banks to the business sector is estimated at P39 million, new BDC investments (loans and equity) totalled P35 million, but net PDSF lending was P459 million and net foreign long-term capital inflows were P243 million. PDSF lending, which is entirely medium and long term, dominates all other domestic sources of medium and long-term finance, making the govemment the largest financial intermediary in Botswana. Fore@ private capital inflows are also substantial, and are larger than all domestic sources of finance apart from the government? Commercial bank lending provides a relatively small proportion of the total.

Although the BSM therefore appears to have made a significant addition to domestic private capital market sources of finance, it clearly has not made much impact on the overall availability of finance; relative to GDP, new capital raised on the BSM was less than 0.4%. Furthermore, in 1993 no new issues took place.


Table 5. Borswana Share Market-new issues

Date Company Type Amount (Pmn)*

1989 1990 1991

1992

Standard Chartered Flotation 12.0 Financial Services Co. (FSC) Flotation 11.3 Into Holdings Flotation 2.3 Botswana Insurance (BIHL) Flotation 8.4 Standard Chartered Rights 10.4 Barclays Rights 4.3 (T A Botswana) Bonds 7.0 ICE Rights 1.7 Pep Flotation 19.0 Real estate Development Co. @DC) Flotation 8.0

* The amount raised includes the proceeds of both the public issue and any private placings with institutions etc. Source: Stockbrokers Botswana Ltd.

Table 6. Sources of long-ternfinance* (P million)

BSMt Commercial bank Botswana Foreign PDSF lending to business Development Corporation private

Long term$ Medium terms Equity LOEiXlS Total long term I I

1988 0 2 20 ..Y 87 150 1989 12 14 27 4 24 27 369 83 1990 11 7 38 21 37 58 512 232 1991 25 28 72 16 45 61 428 531 1992 29 39 60 22 13 35 243 459

* Figures refer to net flows. Excluded are some small non-bank financial institutions, and direct investments by pension funds and insurance companies, mainly in property. t New share issues. $ Over 5 years; own estimate, assuming the same maturity structure for new lending to households and businesses. 5 l-5 years; own estimate, assuming the same maturity structure for new lending to households and businesses.

‘K . . Not available. Includes reinvested profits.

Sources: Bank of Botswana, Stockbrokers Botswana Ltd., BDC

Several of 1992’s issues were prompted by the desire to place 25% of shares in the hands of noncontrolling (parent company) interests in order to achieve the tax concessions introduced in the 1991 Budget, and clearly this will not be repeated.

Capital raising on the BSM shows a distinct pat- tern: early issues were dominated by financial companies (mainly the commercial banks) while from 1991 onward companies in other sectors became more prominent. Share issues enabled the banks to expand their capital base, which in turn helped them to meet the demand for long-term loans, which was rising rapidly due to the high rate of economic growth in 1989-91.8 Later, with rising share prices and price- earnings ratios, the cost of equity capital was reduced and this may have encouraged nonfinancial companies to enter the equity market, especially given signiti- candy higher real interest. rates.

One concern regarding the impact of the BSM is that the need for long-term finance is greatest in the manufacturing sector, partly because of the long-term nature of many manufacturing investments, but also because the sector has been targeted as the key to economic diversification away from the dominant diamond sector. To date, none of the companies listed on the BSM are from the manufacturing sector, and it has therefore made no direct impact on alleviating the shortage of long-term finance in this sector-although this may be partly because many manufacturing companies are small and medium scale, and may therefore not have been suitable for flotation. There may have been an indirect impact, however, in that new equity capital raised by the commercial banks has boosted their ability to make long-term loans, and, as noted above, there has been a sharp increase in the proportion of such loans in total commercial bank lending.


(b) Impact on savings

A key financial and development policy in Botswana is to boost household savings. While there has been no overall savings shortage in Botswana for some time, due to the high level of government savings, the low level of household savings is viewed as a potential problem in the future when government savings are expected to decline (Bank of Botswana, 1989). The current policy objective of achieving positive real interest rates is partly aimed at discourag- ing household borrowing and boosting savings.

The impact of the BSM on savings is difficult to assess. Individuals held an estimated P50 million of shares as at December 1992; this compares with household deposits at commercial banks of P454 million at the same time. It is impossible to know whether the amount held in shares represents additional financial savings or merely a shift out of bank deposits in response to high returns on the BSM in 1989-91. Despite the rapid growth of the BSM, it has not been increasing to its overall role relative to bank savings deposits: the ratio of BSM capitalization to commercial bank time and savings deposits has (with the exception of 1990) been fairly constant at around 50% (see Table 4) over 1989-92. During 1989-91 shares were the only financial instrument offering positive real returns for savers, although in 1992- following sharp rises in real interest rates-savers would have obtained significantly higher returns from interest-bearing deposits than from holding shares. Nevertheless there is little evidence that savings and borrowing are sensitive to interest rates in Botswana, as evidenced by continued rapid increases in consumer borrowing despite substantially higher real interest rates (Bank of Botswana, 1992; Jefferis, 1993).

Traditionally a substantial proportion of household savings is invested in cattle rather than held in a finan-

cial form. Besides having deep-seated cultural value, for individuals cattle represent an economically ratio- nal form in which to save, partly because of extensive government subsidies to the industry and access to common resources (such as water and grazing land) for which individuals do not have to bear the costs. This may not be socially optimal however, and there is increasing evidence of overgrazing and range degrada- tion. As a result there are both environmental and eco nomic reasons to encourage households to save in the form of tinancial assets rather than cattle. There are no accurate or up-to-date figures on whether there has been a shift from cattle to financial savings as a result of the establishment of the BSM or higher interest rates on savings deposits. There is however, anecdotal evidence that some wealthier individuals have sold cattle in order to buy shares.

(c) Impact on institutions

Perhaps the main impact of the BSM has been on local institutional investors, which have taken the bulk of shares issued since the launching of the BSM in 1989. This is first due to the rapid increase in the size of institutional investment funds: the three largest Debswana Pension Fund, DPF, Botswana Life Insurance Ltd., BLIL and IGI Botswana Life Assurance Ltd., IGI-grew from a total of P75 million in 1988 to P299 million in 1992, an increase of nearly 300%. Second, the institutions undertook a substantial readjustment in the composition of their portfolios. Whereas in 1988, prior to the establishment of the BSM, 16% of assets were represented by shares in pub lit companies (later listed on the BSM) and 50% in property, by 1992 this had changed to 32% in each of listed equities and property (see Table 7). Although both had increased substantially in absolute terms due

Table 7. Portfolio composition-major institutional investors (P million)

Listed Unlisted Equities Equities

Botswana Offshore Total Total

Bonds & Property Other Equities* Equities Investments Deposits

1988 12.2 4.2 1.1 37.6 2.5 11.1 21.5 75.3 16.2% 5.5% 10.2% 50.0% 3.3% 14.7% 36.5% 100.0%

1989 21.3 6.5 5.4 52.4 1.4 21.1 54.9 114.1 23.9% 5.7% 4.7% 46.0% 1.2% 18.5% 48.1% 100.0%

1990 50.6 23.4 6.9 71.0 2.0 22.5 96.5 176.3 28.7% 13.3% 3.9% 40.3% 1.1% 12.7% 54.7% 100.0%

1991 12.3 26.0 18.5 80.1 1.0 39.9 138.2 237.8 30.4% 10.9% 7.8% 33.7% 0.4% 16.8% 58.1% 100.0%

1992 95.2 25.7 29.1 97.0 3.5 48.5 169.4 299.0 31.9% 8.6% 9.7% 32.4% 1.2% 16.2% 56.7% 100.0%

* Includes small amounts of deposits and bonds. Sources: BLIL, IGI, DPF


to growth in the size of funds, the increase in the holdings of listed shares (680%) was much greater than that in property (157%), and institutional shareholdings grew much faster than their overall portfolios. Managers of the three funds confirmed in interviews that the establishment of the BSM had been of crucial importance in enabling this readjustment.

It is also likely that the greater availability of local equities has prevented a substantial increase in the proportion of assets held as offshore equities, which has remained constant at around 16%. With an overall equity target of around 60%, institutional funds have been able to approach this primarily by investing in local shares rather than in foreign equities. In the absence of the BSM it is certain that a substantial proportion of funds would have been invested offshore; indeed, it is interesting that none of the three funds have invested offshore anything approaching the 50% of assets which is permitted under exchange control regulations. Without the BSM it is likely that most if not all of the net P83 million invested in local equities during 1988-92 would have been invested offshore- thus representing a net foreign exchange saving for Botswana. Indeed this is far more than the estimated PlO million invested directly in shares from offshore sources. In addition perhaps a further P20 million could have been invested offshore by the smaller institutions, suggesting that in total some PlOO million has been saved, increasing both the capital account balance and Botswana’s foreign reserves. This is relatively small however, compared to cumulative capital account surpluses of some PI700 million since the BSM was established, and to reserves of P8600 million.

The BSM has therefore facilitated the channeling of long-term institutional savings away from property and overseas investments toward equity finance in local companies. The structure of institutional equity holdings, however, reflects that of the BSM itself, and as a result none of these long-term savings have been invested directly in the manufacturing sector, where it is perhaps most needed. This is a major weakness given that the institutions are the largest repository of private sector long-term savings, which represent an important potential resource to fund long term investment.

(d) Privutizution and indigenizution

Privatization has not been a major policy issue in Botswana, where public enterprises have in general been reasonably efficient and have not imposed a major budgetary burden on *government (Jefferis, 1994). Furthermore, Botswana’s economic success means that there has been no outside intervention in the form of International Monetary Fund (IMF) or World Bank adjustment programs, which often

include privatization as a component. To date, there have been no privatizations of directly publicly owned companies, although there has been some discussion in government of the possibility of privatizing Botswana Telecommunications Corporation, which is by far the most profitable of the parastatals. There have been some moves, however, toward the divesti- ture of subsidiaries of BDC. In 1984, some of BDC’s shares in five of its more successful subsidiaries were transferred to the newly established Sechaba Investment Trust, shares in which were then sold to the public (prior to the establishment of the BSM). In 1990, shares in FSC, a finance and leasing company which was a subsidiary of two parastatals-BDC and the National Development Bank--were sold in the second flotation on the BSM. This therefore marked a partial privatization, although the majority of shares remain indirectly owned by government. In 1991, shares in another BDC subsidiary, Botswana Insurance Holdings Ltd., were sold in the fourth BSM flotation, again marking a partial privatization.

The BSM has also enabled the partial indigenization of ownership of foreign-owned companies, including Barclays and Standard Chartered banks, Pep Stores, RDC and IGIInsurance (all now 2530% locally owned). Although this has not marked any change in effective control, it may have led to increased local accountability. Furthermore, Harvey considers that this “was a form of creeping localiza- tion of foreign-owned companies less damaging than the nationalizations which proved to work badly elsewhere in Africa” (1993, p. 14).

There has also been a welcome improvement in the availability of company financial information-which is not generally available (accounts filed with the Registrar of Companies are not public information). There has similarly been an improvement in the level of financial information and analysis in the press, although the general level of awareness of issues around the BSM remains low, which has adverse implications for the market efficiency (Chisambi and Matome, 1993).

7. CONCLUSIONS AND OPPORTUNITIES FOR FURTHER DEVELOPMENT

The BSM has been through three main phases in its short existence. From its opening in June 1989 until the end of 1990 it experienced a major shortage of shares, rapidly rising share values, but relatively low turnover and liquidity. From early 1991 until mid- 1992 the index rose more slowly but still steadily upward, and during this period the market attracted an increasing number of new issues, with a shift from financial to nonfinancial companies among those issuing shares. Since August 1992 the market has seen much less activity, with decline in the index, low lev-


els of demand and an absence of new issues, reflecting the sharp downturn experienced in the Botswana economy during 1992 and 1993.

As the BSM is still relatively new, it is not yet possible to make a conclusive assessment of its impact in terms of the development objectives outlined earlier; financial sector development is a long-term, cumulative process. Even if it is successful, it is also only a partial solution to complex development issues, such as the low level of savings, and can only work in con- junction with other government policies addressing financial sector and other reforms. Furthermore, many of its actual or potential benefits are difficult to quan- tify, such as the impact on public financial awareness of the availability of a new financial instrument (although the major differences between returns on shares and on bank deposits should have stimulated an increased concern with the returns offered by different instruments, at least among the larger savers). Also difficult to assess is its contribution to the overall efficiency of the financial system, and the possible impact of increased competition on the commercial banks.

Nevertheless, some preliminary conclusions can be. drawn. So far, the development of the BSM has been broadly in line with expectations. Although still small in terms of the number of listed companies, the BSM has made a contribution toward the development of Botswana’s capital market. It has opened up a new source of equity capital for companies, apart from retained earnings and partnerships with the Botswana Development Corporation, and has provided a new source of long-term finance in quantities which are significant in relation to those provided by the commercial banks, even though the pace of new capital raising fell sharply in 1993.

Perhaps the greatest impact has been on institutional savers, which have been able to restructure their investment portfolios and achieve a better balance between property and equities. In addition, the BSM has led a substantial net foreign exchange gain through reducing the institutions’ incentives to invest offshore. The BSM has also provided a new link between the substantial long-term savings held by those institutions and the long-term financing needs of companies; no other direct link exists, apart from a small number of unquoted equities held by the institutions. The effect of the BSM on private savings is difficult to disentangle from other influences on savings, such as generally higher interest rates, but is probably quite small.

On the negative side, it is disappointing that the benefits of improved availability of long-term equity finance have not yet spread to the manufacturing sector, which remains dependent upon the commercial banks and BDC-although there may have been indirect benefits to the commercial banks’ long-term lending capacity. It is also clear that support for the BSM is relatively costly for the government: the 11

companies listed paid a total of P32.7 million in tax in 1992, so the concession on reduced company tax will cost the government over P4 million a year on the basis of these figutes.

There remain serious doubts about whether the BSM is in fact a suitable vehicle for raising new finance for the manufacturing sector. The present listed companies are all in low-risk activities- finance, property and distribution-whereas manufac- tming in Botswana is relatively new and risky, and not obviously very profitable. There is no evidence that investors on the BSM are willing to finance high-risk investments, as both individuals and institutions appear to be highly risk-averse. Indeed, part of the development strategy in the early years of the BSM’s operation has been to minimize the risk to individual investors, with the aim of encouraging private savings into the market, and away from alternative forms of saving-cattle, property, or bank deposits. More important, however, is the attitude of the institutions, and the major fund managers have stated quite clearly that they will confine their funds to investment in “blue chip” stocks and are not particularly interested in investing in the Botswana manufacturing sector- whose risk/return characteristics do not compare favorably with the institutions’ alternative of offshore investment.9 Moreover, if domestic investors avoid the manufacturing sector, there is little hope that potential foreign portfolio investors would act any dif- ferently. As a result, the BSM is unlikely to be a major source of finance for manufacmring, despite the (theoretical) role of equity markets being to provide risk capital. A more promising route may be to encourage manufacturing firms initially to seek joint ventures with and long-term finance from the Botswana Development Corporation, but then to encourage BDC to eventually divest its more successful subsidiaries via (partial or complete) stock market flotations.

Unlike many other LDC stock markets, there has so far been no indication of any fraud or corruption on the BSM, with new issues and listings carefully scruti- nized to ensure financial soundness and to minimize the potential for fraudulent claims. While this no doubt partly reflects the relative absence of corruption in Botswana, it may be due in part simply to good fortune, and there is a need to finalize the appropriate legislation and formal& the regulatory and super- visory machinery for the stock exchange.

Despite an encouraging start, it appears that it may be difficult to maintain the early momentum that the BSM has built up. The index showed little or no overall growth in 1993, and no new issues were made. Prices of some stocks have been falling, and it remains to be seen what this does for the general level of con- fidence in the market. Indeed, for the 12 months following mid-1992, the market has seen a reversal of its previous position, with an excess of sellers overbuy-


ers. This situation, however, is unlikely to last. The institutions have a steady inflow of new funds (total- ing at least P50 million a year, although not all of this will be spent on equities), and they will be seeking further shares to purchase, which should help demand recover. The continuing demand from institutions, however, does highlight one of the major problems of the BSM, which is its lack of breadth, both in terms of the number of stocks and the range of economic activities covered. As noted earlier, listed shares are concentrated in the financial services and trade/ distribution sectors, which is rather narrow to obtain a good spread of risks. The key issue, therefore, is to extend the market by broadening the range of companies listed, preferably by encouraging some manufacturing companies to seek listings, or indeed companies other sectors such as construction and services. Unless this happens, it is likely that the institutions will primarily seek to buy equities abroad in the future. Botswana’s manufacturing sector is, however, relatively undeveloped, and comprises mostly small and medium-sized companies. Apart from the one brew- ery, there are no manufacturing companies which are obvious contenders for listing with anything approaching the “blue chip” status which institutions seek, certainly the institutional portfolio managers interviewed were unenthusiastic about the prospects for good quality stocks being added to the BSM in the near future, especially manufacturing companies. This in turn suggests that part of the problem with Botswana’s manufacturing sector may be not so much a lack of long-term finance as a lack of good profitable investment opportunities.

ditions witnessed after the establishment of the BSM have now abated. Inward investment could at that time have led to a squeezing of local investors from the market and caused unnecessary upward pressure on stock prices; in present market conditions this is unlikely. Nevertheless, higher stock prices as a result of inward capital flows would indicate benefits to tirms of a lower cost of capital, and this would further encourage the use of equity capital vis d vis loan finance, with consequent benefits for gearing levels. On the negative side, high levels of portfolio investment could lead to problems of volatility, and one of the issues to be considered in Botswana as elsewhere is how the consequences of volatile flows can be man- aged (World Bank, 1993a).

Foreign purchases of shares on the BSM have, as noted above, been limited. Some restrictions remain on inward portfolio investment, despite recent liberalization, although these are not a significant constraint. Further inward portfolio investment would probably be welcome, especially now that the tight market con-

One solution to the need to broaden the market and make more stocks available to local investors would be to allow the crosslisting of foreign stocks-such as De Beers Centenary-n the BSM. This would not pose any major difficulties, but would require a change in current exchange control regulations, which effectively bar such foreign investments by residents. Another approach would be to use privatization to broaden the market, through the flotation of shares in one or more parastatals. The obvious candidate is Botswana Telecomms, which has been highly profitable in recent years and being a monopoly would no doubt be an attractive candidate for prospective buy- ers. There is, of course, a whole range of arguments involved in the privatization debate, such as the need for regulation of privatized monopolies and the skill requirements this imposes, but one undoubted advan- tage of such a move would be to give a further boost to Botswana’s fledgling stock market. Not only would this add a major good quality stock at a time when institutional demand is likely to be unsatisfied locally, but it would also mark a diversification of the market in terms of the type of companies listed.

NOTES

1. Securities markets in general include primary and secondary markets for corporate equities and bonds as well as government bonds and, increasingly, a variety of derivative instruments such as convertibles and warrants. The focus in this paper is on markets for coqxxate equities (share or stock markets), which is the segment of tbe market receiving most attention in Africa; while many securities markets are dominated by trade in government bonds the issues involved here are rather different (although related) and involve fiscal policy as much as financial reform.

2. Diversification gains are potentially very large. Although mtnrns on shares in emerging markets are volatile, they tend not to be positively correlated with returns in industrial country share markets-and are sometimes negatively correlated. Gn the basis of the performance of the US and emerging stock markets over 1987-91, if investors had held 20% of their portfolio in emerging markets, instead of actual holdings of less than

0.51, they would have increased their average &urn by about

1% a year and significantly reduced theii risks. This suggests that fund managers will steadily increase the pmportion of their portfolios held in emerging markets, and that flows of such portfolio investment am likely to increase significantly in the future (World Bank, 1993a; The Economisr “New ways to grow: A survey of Thitd World finance”, September 25th 1993).

3. Liberalization of the Zimbabwe stock market in 1993, per- mitting greater foreign ownership, has led to increased prices and tumover.

4. During 1965-90 Botswana was the fastest growing country among those for whom the World Bank reports data (i.e., World Bank members with populations of over 1 million). The average annual increase in GDP was 13.9% from 1965 to 1980 and 11.3% from 1980 to 1990 (World Bank, WDR, 1992, p. 221).


5. In October 1993 BDC sold a 25% stake in SBL to Robert Botswana Development Corporation. Foreign private Fleming Ltd. a UK merchant bank. inflows are mainly for mining.

6. With similar personal and company tax rates, this makes 8. Total commercial bank lending grew on average by 41% the tax system neutral as between loan and equity finance for a year during 1989-91. Despite being characterized by companies (loan interest is tax deductible for the company excess liquidity, the banks claim that their ability to lend long but taxable in the hands of the recipient; dividend term was constrained by the predominantly short term nature payments are not tax deductible but are tax free to the recip- of their deposit base. ient).

9. Under present exchange control regulations, individuals 7. PDSF lending is dominated by loans to the Botswana are prohibited from holding foreign financial assets; institu- Housing Corporation, Botswana Building Society and the tions can invest up to 50% of their portfolio offshore.

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Documents

The Botswana share market and its role in financial and economic development