Hard look, redesigning needed at the Dar es Salaam securities mart

16Jan 2019
Dar es Salaam
Financial Times
Hard look, redesigning needed at the Dar es Salaam securities mart

TRENDS at the Dar es Salaam Stock Exchange (DSE) in mid-2018 and up to the end of the year were not good, and some analysts are beginning to worry about a stagnant stock exchange left to itself instead of being supported to thrive and deliver the goodies it was formed produce.

That was a strong message in a seminal analysis of the situation at DSE and other African stock exchange markets, where the locally based analyst attributed the trend to changes in monetary policies of developed countries, which is strictly speaking an inadequate explanation. The usual conceptual modality of forwarding this explanation is that we depend on a positive mood there, instead of capitalising on their fears.


Without seeking for connections between the 'bearish' tendency at DSE with what is happening in foreign markets, it is vital to look at what is happening internally, and it is evident that the poor liquidity levels are consonant with what we generally know for instance of lending to the private sector.


There is a poor level of liquidity in the private sector which started with late 2015 reforms of the structure of government expenditure, taking development expenditure from 26 per cent of the total budget to upwards of 40 per cent in the financial year ending June 2016.  This shift needed complementary tools to uplift DSE activity.


Development expenditure by itself does not lead to a bearish environment in the stock exchange as it pushes up demand in various industries, not least in building and construction. If these activities also ignite heated land purchases or substantial compensations where construction is to take place, this puts new investments and thus creating jobs, as the windfall enhances both investment and consumption capacity.


Real demand for both capital goods and consumer goods rise, all of which is then reflected in the stock exchange, as more disposable income leads to more savings, more deposits and more stock purchasing.


Illiquidity and stagnant trading at the stock exchange has a number of parameters, one of which is less disposable incomes that are put to savings, deposits and share purchases (as these financial market products are similar). It is also possible that there is a net outflow of funds to other markets, that is, disposable or investible funds being directed elsewhere other than DSE.


That is why the whole reference to negative trends in other markets as an explanation for the DSE situation is unfortunate, as it shows that there is no stock market design that uses difficulties in the US or EU markets to our benefit, instead of vice versa as it is.


As the analyst pointed out, there is a danger of DSE continuing in the tendency towards value decline without igniting a push on the part of foreign investors to pick up the cheaper stocks and make the market buoyant again.


Part of the problem is the DSE is a one-sided stock market, with industrial stocks and options that aren't backed by land or real estate; it is more or less like operating a national currency that isn't backed by gold, that when it declines it has no lever to cushion its fall. DSE is all about industry while there is no trading in fixed assets owing to absence of right of establishment for foreigners, dual citizenships, etc.


The basic purpose of setting up a stock exchange market is to raise capital for listed companies, but those who place their savings and deposits in the listed companies aren't doing so for charity or for national development but for their own future.


They are thinking of growing that money for the current and future generations, as stock purchasing is something whose real value is seen not in annual dividends but in gradual rise in value such that initial limited share purchasing becomes a fortune later. Reduced consumption at the wider level would have led to fixed property values rising, but there is no such 'backstop,' so DSE just fails to optimally deliver.


In that case to say that DSE has fallen because worldwide trends are negative is singularly inaccurate, as it lends credit to the surplus and leftover version of the sort of funds that are routinely available at DSE, that when foreign markets are illiquid, the funds go there - or go back home. 


As a matter of fact the reality is that those who place funds in DSE are working with a medium term view of things, and when illiquidity rises, funds that would enhance share values are committed elsewhere, and those who remain have little to trade with one another as they all want to sell.


That is why a redesigning of DSE is necessary so that it has a deeper anchorage in the country's economic activity, by adding immobile assets to tradable securities. It means raising land titles to proper ownership and allow right of movement, establishment, even citizenship. In so doing, when the going is rough overseas they transfer savings and deposits this side, and DSE grows.