Macroeconomic drivers of stock market capitalization in Sub-Saharan Africa: An econometric analysis of Botswana, Ghana, Kenya, Mauritius, Nigeria & South Africa

Herbert Julius Garonfolo

Student thesis: Master thesis


The purpose of this paper is two-fold. Firstly, it explores the macroeconomic environment of Sub-Saharan Africa, and accounts for mutual challenges and characteristics that might exist among these economies. Secondly, it analyzes how macroeconomic variables affect stock market capitalization by using co-integration analysis. The assumption underlying the use of market capitalization as an indicator of stock market development is that the size of the stock market is positively correlated with the ability to mobilize capital and diversify risk (Levine, 1996). Based on the two pillars mentioned above, the thesis forms an empirical platform on which African policy-makers and economists from the World Bank and IMF can learn how macroeconomic indicators interact with the stock markets in Sub-Saharan Africa. In order to provide a sufficient framework for understanding the macroeconomic environment of Sub-Saharan economies, the thesis presents stock market and macroeconomic profiles of the countries in this study. These profiles help in identifying common challenges and opportunities that apply to Sub-Saharan Africa. Understanding the interactions between macroeconomic indicators and market capitalization helps investors optimise their portfolios and guide policy-makers in forming policies that are beneficial for the development of stock markets and accessibility to financial capital through financial markets. The thesis distinguishes between two groups of economies, namely resource-driven economies and diverse economies. Each type of economy has its unique challenges and opportunities with regards to the macroeconomic environment. Diverse economies tend to be associated with a high value added from the services sector, and with less vulnerability to shocks in the terms-of-trade. Resource-driven economies, on the other hand, are subject to increased vulnerability due to fluctuations in commodity prices. Hence, resource-driven economies have a tendency towards more unstable macroeconomic environments. However, having a rich natural resource base also has some obvious advantages. If exploited successfully, natural resources provide a country with goods that can be traded, and hence guarantee a certain revenue stream from exports. Due to the many risks associated with being highly dependent on a limited number of resources, a diversified economic structure is something that in principle is desirable. To foster and maintain a diversified economy, mechanisms for efficiently allocating investment resources across and not merely within economic sectors are important. To allow for this process, it is crucial to set up a framework allowing the development of a sound banking sector and strong stock markets. The macroeconomic and fiscal management has greatly improved during the last decade, and most of the economies are succeeding in controlling inflation and ensuring reforms that allow for a strong and healthy growth. A firm commitment to improving infrastructure and enhancing the business environment through more efficient public administration and reduction of red tape is observed. Concerning stock exchanges, market capitalization and the number of listed companies are generally on par with EU frontier markets, except for South Africa which exhibits levels comparable to the BRIC countries. When it comes to turnover ratios, we observe that Sub-Saharan Africa is plagued by low ratios. The turnover ratio reveals that compared to other regions, market liquidity is low in Sub-Saharan Africa and the level of transaction costs is high. Furthermore, the low turnover ratio is interpreted as a sign of limited access to the markets. The variables that were found to have the strongest influence on MC are GDP, CPI, the money supply, imports & exports, FDI and value added from the banking, gas, electricity & water, manufacturing and the services sector. From a purely macroeconomic point of view, it is therefore recommended that developing economies interested in enhancing their financial system with a stock market pay special attention to creating the best possible environment for GDP growth by ensuring: That inflation is under control through prudent monetary policy (managing the size and growth rate of the money supply and the level of the interest rate). Openness of the economy through international trade and FDI. A focus on developing the banking sector and infrastructure (gas, electricity & water) of the economy. Furthermore, services and manufacturing drive the development of MC through their contribution to diversifying the economy and increasing the international trade.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2011
Number of pages174