R Davies: 10th Annual African Stock Exchanges Association
Conference

Programme Director
Distinguished participants

I thank you for this opportunity to address your annual conference, which is
being held this year under the very appropriate, yet challenging, theme,
"Africa � An Investment Destination."

Few would deny that we are witnessing the start of a golden age for emerging
economies. One only need look to the cases of India and China to know the giant
steps being taken to uplift literally billions of people in what were until
recently some of the world's poorest, previously excluded and marginalised
societies. With each having populations over 1 billion strong and sustained
near double-digit economic growth rates, the global powerhouses are now
compelled to sit up and take notice of developments in these economies and to
recognise that for their companies and economies to continue to flourish, they
cannot afford not to be involved in these new markets. We are indeed witnessing
a revolution that is seeing profound shifts in the locus of global economic
power.

Africa, however, is all too often and all too quickly overlooked in this
ongoing search for new opportunity. This, we are convinced, is an oversight
that investors will pay dearly for, particularly as African economies take
steps to enhance their real intrinsic value as investment destinations.

There are two important elements we need to consider in confronting the
challenge of promoting capital market growth in Africa. The first relates to
the challenge of attracting foreign investors, and ensuring an appropriate
channelling of foreign capital to activities that will develop the productive
forces on our continent. The second issue relates to domestic capital market
development, in other words to the challenge of growing local capital markets
along with increased savings. Related to this second point, is the possible
leveraging of the relatively strong financial sector and telecommunications
infrastructure in South Africa to assist economic development in our African
neighbours.

One estimate suggests that over the next 10 years, Africa (excluding South
Africa) will require capital investment of almost US$400 billion to underpin an
annual average growth rate of 6%. As local institutions can provide only around
60% of this, around US$160 billion will need to be sourced from international
private sources.

Governments and other stakeholders across the continent have an obligation
to ensure that the world notices what the 800 million strong African markets
have to offer. But only if we work together and leverage off our shared
strength, will we be able grow on a scale sufficient to break the existing risk
association from which our continent suffers.

Financial sector development and growth

A wealth of academic evidence supports the view that there is a golden
thread linking financial sector development and overall economic growth. This
derives not only from the direct contribution of the financial sector to the
Gross Domestic Product (GDP), but also from the ability of better developed
financial systems to ease external financing constraints faced by firms,
particularly small and medium firms, in all sectors.

Financial system development has the potential to mitigate market frictions,
for example, by reducing the costs of acquiring information, enforcing
contracts and also by ensuring that transactions provide the right incentives
for generating financial contracts, markets and intermediaries. Financial
institutions and instruments in turn affect the allocation of resources.

So, as a country's financial system develops and strengthens, it ultimately
is relied upon to produce information, to efficiently allocate capital, to
appropriately monitor firms thereby assisting in raising standards of corporate
governance, to provide mechanisms for trading, diversification and risk
mitigation, to mobilise savings, and to ease the exchange of goods and services
by lowering transaction costs, in turn promoting increased specialisation,
technological innovation and growth.

The benefits of financial sector development are clear. And yet so many of
our countries continue to suffer impediments to the realisation of this
objective, with negative consequences for broader economic growth and poverty
alleviation goals. We need, therefore, to seriously analyse what it is that is
standing in our way, and devise appropriate strategies to move us forward. As
one author succinctly put it, "small size is a problem in finance." Indeed,
relative to large systems, financial services in smaller systems are more
limited in scope, more costly, and of poorer quality.

Limited local demand for many financial services may mean that there are too
few players to underpin a competitive market. The market, indeed, may be too
small for even a single financial service provider to reach the required
economies of scale. Smaller systems are also more volatile and have fewer risk
diversification opportunities.

Other dangers of systems that are too small is that they are less likely to
offer a comprehensive product range, especially secondary components, like
credit information services. The regulatory infrastructure will also tend to be
of higher cost and burden to the State, and market participants,
respectively.

In looking at appropriate policy responses to issues like these, a recent
Southern African Development Community (SADC) report suggested three
complementary policy approaches. The first is for a country to open its markets
to flows of capital to and from foreign markets. The second is for a country to
open its markets to foreign financial intermediaries, including by granting
access through allowing the takeover of a local bank or the setting up of
subsidiary branches.

Finally, and this is the most critical for the purposes of our discussions
here this week, the SADC report argues that small developing economies can
benefit from greater regional integration of financial systems. In its ultimate
form, this would involve full monetary union, and a single licensing and
regulatory regime. However, as the experience of the European Union
illustrates, many intermediate steps are necessary before that ultimate
objective can be sustained.

Regional integration � costs and benefits

Pursuing a little further the arguments in favour of pursuing greater
regional co-operation and integration in the financial sector, expected
benefits from the realisation of greater economies of scale would be expected
to include better regulatory compliance and improved management and back office
performance. Consumers would benefit from the expected increase in competition
that should improve access opportunities, matched by lower prices and better
quality, relevant products.

The eventual merging of financial markets and infrastructure would also
allow governments, financial intermediaries, and private sector and
non-government institutions access to a deeper, more liquid and efficient
capital market.

Finally, all stakeholders would be expected to benefit through a lower
regional average cost of capital and debt, while at the same time offering more
opportunities to reduce risk through diversification, improved market liquidity
and the availability of new investment instruments.

A cautionary note, though: financial integration would impact on a country's
sovereignty, benefits may be distributed unequally across the region, and while
efficiency gains are likely to benefit financial service providers, it is by no
means automatic that the majority of populations, and especially the poor, will
enjoy improved access to suitable financial offerings. These are risks against
which we must work actively and consciously as we embark on a financial sector
integration programme.

Translating words into action

So what does this theorising translate into for our capital markets and
exchanges? Consider some of the SADC numbers, taken from the end of 2004.

With 240 million people, SADC accounts for approximately one third of the
African population and has a combined Gross Domestic Product (GDP) just under
US$300 million. Most SADC countries have capital account restrictions although,
like South Africa, may be in a phase of capital account liberalisation. Total
financial assets are typically less than a third of GDP, as are total deposits,
and yet paradoxically, most SADC countries have their own stock exchange.

Formed in recognition of an exchange being a key institution in economic
liberalisation, and in many instances to facilitate privatisation efforts
through domestic flotation, many of these institutions experience
sustainability problems through low trading volumes and inefficient pricing
through illiquidity.

Recognising the critical challenge of attracting low cost capital and debt
for development through efficient, liquid, cost competitive exchanges, stand
alone exchanges under the concrete conditions we face in SADC cannot surely be
the optimal response. In this area, in particular, we need urgently to confront
the challenge of advancing integration.

The Finance and Investment Protocol

An important step forward in addressing these challenges was the approval
and signing of the Finance and Investment Protocol (FIP) at the SADC Summit in
Maseru on 17 August 2006. The Committee of Southern African Stock Exchanges
(COSSE) and Committee on Insurance, Securities and Non-Banking Financial
Authorities (CISNA) deserve credit for all the hard work they put in during the
preparation of the FIP and the completion of the Memoranda of Understanding
(MOUs).

The Finance and Investment Protocol essentially defines the road map to the
eventual achievement of the goal of integration of the region's financial
sectors. It defines targets for macro-economic convergence, harmonisation of
tax policies, co-operation on investment promotion and in the area of
development finance. It also calls for greater co-operation among the stock
exchanges of the region. While the FIP thus represents an important step
forward, it also challenges all of us to ensure its implementation with even
more vigour and commitment by the member states and other stakeholders.

As we move forward on our path to greater financial sector integration
guided by the FIP, we believe it is essential that the opportunities that exist
in South Africa for domestic and international financial sector investors are
not ignored. As the biggest economy in SADC, and with its existing relatively
sophisticated financial sector, South Africa already provides an entry point to
the SADC region for many existing foreign investors. Moving forward, government
and private sector stakeholders in South Africa are committed to enhancing the
capacity of this country's financial institutions to contribute to funding
Africa's growth. We see stronger regional growth as being to the advantage of
all the SADC countries, and their respective investors. Finding ways to enhance
our capacity to contribute to financing African development is therefore a top
priority.

As I indicated earlier, research has concluded that investment requirements
necessary to achieve growth targets of 6% are too large to be funded by the
multilateral financial institutions and domestic savings at current levels, and
will accordingly have to be raised from private international sources of
capital.

We believe that South Africa is well-placed to facilitate cross-border
capital flows to neighbouring countries undergoing rapid development. Our banks
are sophisticated; the bond and equities markets are among the largest in the
developing world, and our regulators respected.

South Africa is thus well placed to help fund Africa's expansion. First,
South Africa can provide a direct source of capital, with a pool of R1 600
billion (US$250 billion). Second, South Africa can leverage its sophisticated
capital markets infrastructure to facilitate the flow of foreign capital into
African countries.

South Africa, in short, has the potential we believe to emerge as a regional
financial hub. We believe that this would be of benefit not just to ourselves,
but mainly to the region as a whole. A regional hub of the type we envisage
would not, I should stress, be a substitute for the development of sound
national financial systems. Indeed, the need to mobilise and intermediate
domestic savings in African nations renders the continued development of
national financial systems critical. It is likely that the bulk of domestic
intermediation in African nations will continue to occur through the banking
system rather than through capital markets. As domestic institutional investors
grow in importance, moreover, domestic capital markets will gain in
strength.

With this said, Africa's economies cannot wait for the slow maturing of
national systems to meet the needs of attracting and directing increased
volumes of private international capital. This requires international-quality
intermediation and risk mitigation services; South Africa is positioned to
engage with its neighbours to provide these services in the foreseeable
future.

Programme Director,

These are a few thoughts offered from a South African perspective. I hope
that you will have an opportunity to reflect on some of these ideas and
proposals in the course of your proceedings over the next few days. I wish you
well with this conference and hope all delegates will find it a productive and
worthwhile event.

I thank you

Issued by: Department of Trade and Industry
18 September 2006
Source: Department of Trade and Industry (http://www.dti.gov.za)