MARKET DATA REVIEW: How to achieve ‘frontier market status’ in four years

This is the first of two articles that I intend to pen in the endeavour to achieve a frontier market status for the DSE in four years. Read on…..

The Dar es Salaam Stock Exchange Plc (DSE) has undertaken a study on the enhancement of its existing products as well as the introduction of new ones in the stock market. If this comes to pass, we will have migrated our local capital market from where we are into a ‘frontier market’ category in a period of five years. Currently, we are not a rated market.

Should we move into the next level as envisaged, we will then stand a chance of achieving “an emerging market status” within the next 15 years.

Currently, the DSE has 13 licensed dealing members (LDMs), five government securities LDMs, three custodian banks, 25 listed equities, four outstanding corporate bonds and a number of government securities listed on the exchange valued at Sh6.5 trillion.

Our annual equity turnover averages Sh500 billion while our equity market cap is about Sh18 trillion (less than 20 per cent of Tanzania’s GDP – the ratio far lower to many measures). However, 2017 is poised to be more vibrant in terms of depth and liquidity especially with the listing of telecom firms and possibly mining companies IPOs as required by law.

In the economy at large, the government is doing an excellent job to industrialise and enhance the infrastructure of the country and is simultaneously managing to lower interest rates from the highs we have seen in the recent past of 15 to 18 per cent.

In this context, the DSE felt that it was important to expand the range of products and services that are available to issuers, intermediaries and investors whilst also taking a critical look at its existing products and services to ascertain how to make the existing markets more efficient, with fewer friction costs.

Today, the DSE offers nine billable products and services while the CSD has 5 products. The DSE also provides a number of services for free to the market in the interest of supporting its growth.

In the study that we have just conducted, we have taken a close look at 28 products and services in total which collectively will enable the Government and Private Sector issuers to raise capital on a more focused basis.

Therefore, in the primary markets instead of the DSE being a type of “delicatessen”, offering a few focused products for raising capital, it is proposed to significantly extend the types of listings to become like a “supermarket”.

Our plans are extensive and we plan to explain them over the course of the day but if I may summarise some of the key points; we now have concrete plans to develop the following products:

• Listing of Treasury Bills if the government, CMSA and BoT decide to go ahead with its extremely innovative ideas for financial inclusion with the M-Akiba Micro-Savings Bills and Bonds. The DSE is truly supportive of this initiative as it will achieve financial inclusion and enhance financial literacy, attracting more capital from the informal economy into the formal economy through a relatively safe investment product across the mobile network infrastructure. The DSE has already attracted an extra 250,000 investors into the market through its limited forays with mobile – we expect that a government backed product will achieve success on a much grander scale, increasing the overall liquidity of the economy.

• Infrastructure and industrialization products (bonds and equity); these will provide the platform for the Government and the private sector to raise capital through the public markets. Many of these initiatives have strong economic propositions and lend themselves to being listed on the market, sharing the investment risk with the private sector.

• Real estate investment trusts: with these, we envisage to support the significant property development, rental and social housing needs of the country. Whilst we have the framework for this product, international experience shows that this is critically dependent upon tax efficiency and the DSE plans to discuss the benefits of such proposals with the Ministry of Finance and Planning.

• Municipal Bonds enabling cities or municipalities to take advantage of their legal ability to borrow and to ring fence certain developments into listed products that local and national investors would be willing to support

• Depository Receipts: for those companies that have operations in Tanzania but are – the DPs are expected to create a secondary placement for such companies in our local market. But as you are aware, there are seven companies listed on the exchange, whose primary listing is in London and Nairobi.

This facility will enable these and others to cross list and trade their securities without necessarily having to issue more shares but with the added advantage of developing their brand and capital base locally. This may be particularly valuable for mining and natural resources based companies.

• Then, there is a special and innovative product targeted at banks; given we already have 7 banks listed on the exchange -- negotiable certificates of deposits (NCDs), will enable these banks, if they so wish and others to lower their cost of capital while also extending their depositor base.

• On the Pre-Enterprise Growth Market (EGM) listings -- with a crowd funding solution becoming relatively common in other markets – we see the introduction of this platform targeting capital raising from high net worth individuals, will help fill a gap in the venture capital space for young SMEs and start-ups.

• We also propose a range of fund types products – exchange-traded funds and closed-ended funds as well as derivatives.

All of the above will initially be available in Tanzanian Shillings, but the DSE recognises the economic needs to support the Government’s plans to steadily achieve capital account liberalisation which will facilitate the possibility to offer these products in multiple currency, thereby recognising that Tanzania is operating in a cross-border truly global world.

This will in itself enable further extensions of the market, by, for instance, allowing Government to extend its M-Akiba savings bills and bonds to a “diaspora bond” thereby helping citizens to repatriate capital from abroad.

The secondary market will also see some transformations. As it is, Tanzania needs to adopt many international standards especially given the fact that currently, foreign investors account for over 70 per cent of the DSE’s market activities.

Our current market structure has served its purpose of getting us off the ground, but now we need to catch up with modern methods; our goal being to make the price formation process on the market very much a “public good”, whereby we maximise liquidity at the lowest cost per transaction.

In the next episode, we will look at the regulatory reforms that will be required for the DSE’s flagship products to move ahead. Don’t miss!

Mr Marwa the chief executive officer of Dar es Salaam Stock Exchange Plc