Economic growth in modern economies revolves around an efficient and effective financial sector that is able to pool domestic savings and mobilizes capital for productive projects, the absence of which could leave most productive projects unexploited.
The role therefore of capital markets is vital for inclusive growth in terms of wealth distribution and capital security for investors. Capital market describes the market where medium and long terms finance can be raised and offers variety of financial instruments that enable economic agents to pool, price and exchange risk.
The capital market is therefore essential for governments and other institutions in need of long term funds for long term capital for investment in economic developmental project.
Recent studies linking capital market development and economic growth suggests that the capital market enhances economic growth and development. Countries with well-developed capital markets experience higher economic growth than those under-developed.
Evidence indicates that, while most capital markets in African countries are relatively underdeveloped, those countries which introduced reforms that are geared towards development of capital markets have been able to grow at relatively higher and sustainable rates.
A study in 2011 showed that South Africa, the country whose capital market is the largest and most developed in Africa, in terms of market capitalization and trading volume, has been growing significantly since 2000.
Its average per capita real Gross Domestic Product (GDP) over the last 8 years has been at 3.2 %. Countries including Egypt, Ghana, Tanzania, Botswana and Mauritius, whose capital markets have been developing recently, were able to realize average per capita growth rates of more than 2.8% for the past 8 years.
However, some economies which did not have formal or effective capital market like Lesotho, Seychelles and Ethiopia could not manage to realize average per capita growth rates above 2.7 % over the past 8 years. Even those countries with small and less developed capital market like Swaziland and Uganda did not manage to realize average per capita growth rates above 2.7 % during the past 8 years, this is according to the CBL Economic Review, August 2009, No. 109.
Ghana seeing the potential in the capital market has begun to put in place structures to harnessing the titillating opportunity.
Director General (DG) of the Securities and Exchange Commission (SEC), Rev. Daniel Ogbarmey Tetteh believes the country could use capital market to leverage economic growth and development.
Speaking at a day’s training workshop on Thursday to enhance the capacity of financial journalists on capital market reporting, he underscored the role of the capital market to the country’s economy.
“The capital market plays a critical role to the economic and growth agenda of the country and we are committed in ensuring that we play the role of both protecting investors and also achieving the goal of market development,” he said.
He outlined a number of measures being put in place by the regulator to raise revenue and engender growth.
“We are currently in a process of coming up with a number of regulations, guidelines that will help get our market operators to operate their business. We have the corporate governance code, code of business conduct, we are setting new capital requirement, some guidelines on private funds and very soon, we can talk about commodity exchange.
We are also going to implement and operate a regulatory compliance portal to make it easy for our operators to provide information and through that we are going to be able to create a database that will accessible by many people so that they can get information on companies, Rev. Tetteh explained.”
The DG further disclosed the commission would introduce a quarterly press briefings in the middle of 2018 to put out information on happenings in the industry.
“We will introduce quarterly press briefing and we want to position it like how the Monetary Committee Policy of the Bank of Ghana meets the press every two months and issue a statement, so every quarter we will put out our search on what is happening in the industry; if there are some red flags that we think people must be aware of, we are going to flag them.
It will also be the time for naming and shaming because people need to know the operators who are not doing well or who are engaged in all kinds of questionable practices so it’s going to be an important platform for the media to report on the happenings in the capital market to the wider public,” he said.
Such measures, the DG disclosed was geared towards ensuring an efficient capital market to drive economic growth and development.
Manager, Ghana Alternative Market (GAX) at the Ghana Stock Exchange (GSE), David Tetteh in an interview bemoaned the situation where few companies had listed on the GAX to access funding to improve their businesses.
He urged local companies to access funds from the GAX to expand their businesses since there was so much money available for companies who were willing to make their presence on the GAX platform through listing equities or debt securities.
The capital market portends great potential for the growth of the country’s economy. Some of the benefits are discussed as follows;
Capital market increases the proportion of long-term savings. It enables contractual savings industry (pension and provident funds, insurance companies, medical aid schemes, collective investment schemes, etc.) to mobilize long-term savings from small individual household and channel them into long-term investments.
The implication will be an increase in productivity within the economy leading to increased employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital
Furthermore, the capital market allows not only an efficient allocation of the financial resources available at a certain moment in an economy from the market’s point of view but also permits to allot funds according to the return and the risk from the investor’s point of view offering a large variety of financial instruments with different profitable-risk characteristics.
From the issuers’ view, the money which is necessary for the unfolding of their activity can be mobilized by the help of the capital market at accessible costs, smaller than those possibly obtained from the banks or other financial intermediaries.
Capital market also provides equity capital and infrastructure development capital that has strong socio-economic benefits through development of roads, water and sewer systems, housing, energy, telecommunications, public transport, etc. These projects are ideal for financing through capital market via long dated bonds and asset backed securities. Infrastructure development is a necessary condition for long-term sustainable growth and development.
Moreover, capital market increases the efficiency of capital allocation by ensuring that only projects which are deemed profitable and hence successful attract funds. This will, in turn, improve competitiveness of domestic industries and enhance their ability to compete globally, given the current momentum towards global integration. The result will be an increase in domestic productivity which may spill over to increase in exports hence, economic growth and development.
Finally, capital market promotes public-private partnerships to encourage participation of private sector in productive investments. The need to shift economic development from public to private sector to enhance economic productivity has become inevitable as resources continue to diminish and assists the public sector to close the resource gap and complement its effort in financing essential socio-economic development, through long-term project based capital. It also facilitates inflows of foreign financial resources into the domestic economy.
It is the expectation of the general public that the government, through its relevant authorities; the SEC, the GSE and other bodies will up their game at the capital market to raise the needed revenue to drive economic growth and development. Enditem