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Monday, August 27, 2007

Kenya as an Emerging Capital Market (Part I)

Thanks to a blog comment by Bankelele, press statements and an email i got from Strathmore (which happens to have been my former university) on the upcoming finance conference on the capital markets i have ventured to look into this new phenomenon that is set to revolutionize the way business in done in this part of the world. The forum dubbed 'Kenya as an emerging capital market' will endeavor to address issues including monetary policy and capital markets, the integration of the East African capital markets, NSE as an engine for growth, private equity and venture capital, using capital markets to fund infrastructure and the the formation of the EA capital markets.
I therefore wish to expound on this issue that i hope will be comprehensively addressed during the capital markets forum on Friday 7th September 2007.

Emerging Markets
This is a term coined in 1981 by Antoine W. van Agtmael of the International Finance Corporation of the World Bank.
An Emerging Market Economy (EME), or Developing Market Economy (DME) is defined as an economy with low-to-middle per capita income. Such countries constitute approximately 80% of the global population, representing about 20% of the world's economies. The term emerging markets is commonly used to describe business and market activity in industrializing or emerging regions of the world.

What an EME Looks Like

  • EMEs are characterized as transitional, meaning they are in the process of moving from a closed to an open market economy while building accountability within the system.

  • As an emerging market, a country is embarking on an economic reform program that will lead it to stronger and more responsible economic performance levels, as well as transparency and efficiency in the capital market.

  • An EME will also reform its exchange rate system because a stable local currency builds confidence in an economy, especially when foreigners are considering investing. Exchange rate reforms also reduce the desire for local investors to send their capital abroad (capital flight).

  • Besides implementing reforms, an EME is also most likely receiving aid and guidance from large donor countries and/or world organizations such as the World Bank andInternational Monetary Fund.
Emerging Economies:
These are countries considered to be in a transitional phase between developing and developed status. Examples of emerging markets include China, India, Mexico,Brazil, much of South East Asia, countries in Eastern Europe, parts of Africa and Latin America.
The term "rapidly developing economies" is now being used to denote emerging markets such as The United Arab Emirates, Chile and Malaysia that are undergoing rapid growth.

Top 4 Emerging markets
According to the latest findings from the Grant Thornton International Business Report (IBR) published on April 19 2007, Mexico, Indonesia, Pakistan, and Turkey are the emerging markets to watch. They have identified them as the next generation of emerging economies set to have significant impacts on the world economy, although Mexico was already identified as an important economy in studies such as BRIMC (Brazil, Russia, India, Mexico and China), or as part of the G8+5. These countries may match or even overtake some of the commonly identified BRIC economies (Brazil, Russia, India and China) which are expected to join the global economic powers, although these economies are unlikely to match India or China in strength.

According to CEO of Grant Thornton, Indonesia and Pakistan, with their large populations, have the potential to grow their labour intensive exports and could capitalize on the process of low-cost production that mainland China has so successfully exploited.

World Stock Markets
Billions of dollars of share priced have been wiped out in world stock market, while credit markets have gone through a period of repricing that prompted fears of a meltdown. It is as if the world markets catch cold when the US market sneezes which set up the herd contagious instinct amongst investors. Contagion is the herding behaviour when expectations cause investors to pullout in response to a shock that hits the market. The expectations become self fulfilling when the behaviour causes a collapse of the markets despite sound fundamentals. As globalization advances, increased capital flows are likely to exacerbate the interdependence of economies and heighten the possibility of contagion.

EME vis World Markets
The integration and interdependence of financial markets has become evident in current years and the US markets being the largest in the world triggers contagion whenever a crisis such as the sub-prime mortgage loans hits it. This has far reaching effects on the emerging markets of Africa and Kenya is no exception.

Emerging Market Economies (EME) have to watch closely how the developed financial markets undertake their business operations in relation to their overall stability if they are to continually poise themselves for stable macroeconomic environments and capital markets advancements.

Local Politics vs. Global Economy
An emerging market economy must have to weigh local political and social factors as it attempts to open up its economy to the world. The people of an emerging market, who before were protected from the outside world, can often be distrustful of foreign investment. Emerging economies may also often have to deal with issues of national pride because citizens may be opposed to having foreigners owning parts of the local economy.
Moreover, opening up an emerging economy means that it will also be exposed to not only new work ethics and standards but also cultures as well: indeed the


Although emerging economies may be able to look forward to brighter opportunities and offer new areas of investment for foreign and developed economies, local officials of EMEs need to consider the effects of an open economy on its citizens. Furthermore, investors need to determine the risks when considering investing into an EME. The process of emergence may be difficult, slow and often stagnant at times. And even though emerging markets have survived global and local challenges in the past, they had to overcome some large obstacles to do so.

Kenya as an Emerging Market Economy (EME) therefore needs to brace itself for challenges that comes alongside this new recognition.

1 comment:

Anonymous said...

but alas - the university that seeks
to enlighten us on the emerging economy does not know how to use email. I challenge you to send a n email to the admission office. and tell me how long if ever someone replies to it. It's trivial things like that scare me more than anything else