Posted by: Armel | February 10, 2009



Is it possible to be pro-markets while being anti stock exchanges when it comes to some developing economies?

The price of a stock is a function of multiple factors among which the markets participants play a major part. When the participants are panicking and dumping stocks, prices crumble and it becomes inevitable to request a “bailout” especially if the tumbling companies are a vital part of the economy or major component of GDP.

When it comes to Africa, let’s consider the example of any country with it’s own currency, a vibrant private sector, and a decent local consumption level. If there was to be a major economic downgrade, what will happen then is that, their central bank will issue bonds to help sustain the crisis. Local and foreign institutional investors in the best scenario will purchase that debt. The debt from that country has a market value only because investors foresee a chance to recoup their money ! (It’s that simple).

Now, let’s take the example of an African country in the CFA zone. Lately, they have been pushing hard for the public to embrace and show more enthusiasm towards the creation/extension of their local stock exchanges. If any of these countries major indexes or leading publicly traded corporations were ever to tumble for whatever reason (market manip, naked option shorting, etc..), their entire economic system would collapse (Iceland). Not “might” but “will” collapse.

In the aftermath, no financial institution will be crazy enough to purchase bonds from those states to help them refinance and re-structure their growing debt, simply because there’s no constant local demand to speak of (mostly). So, the only other option will be to hand the key of the country to Bretton Woods and let them run it as they see fit. But in most of those countries, Bretton Woods already got those keys !

Bottom line: Let’s make sure the foundation is solid and the safeguards are there, before moving forward.

Armel Njeunou



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  2. How do you reconcile the two?

    Either you are absolutely pro-markets or you are not ! The particularity of Africa has nothing to do with it. The issue is good governance. If that is not addressed, the control procedures wouldn’t never stand the test.

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