Stock market development and economic growth in Africa's frontier markets

Kanetsi, Bophelo
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This study investigates the relationship between stock market development and economic growth in seven Sub-Saharan African countries. Previous studies found that causality runs from finance to growth, and that stock markets have had a positive impact on economic growth, particularly in countries with well-functioning financial institutions. This theory however, is not conclusive markets of Africa. The study therefore aims to bridge this knowledge gap, i.e. whether the development of their stock markets can be attributed to the rapid economic growth experienced in the last decade and/or vice versa. Using Vector Autoregressive Regressions and Causality tests from 1990 to 2012, the study found that the bourses under study are partially and in some countries marginally responsible for output growth. Only in Namibia was there bi-directional causality between stock market development and economic growth. After controlling for a host of factors that may affect the relationship between stock market development and economic growth, the study found that labour participation and exports of goods and services play a vital role in increasing gross domestic product. A number of policy lessons arise: (a) countries that wish to develop bourses should first be extending credit to the private sector and improving the status of local banks. Given the weak relationship between stock markets in Africa’s frontier markets and credit provided by banks, it is advised that policy makers develop their banking sector before developing bourses. (b) Another area worthy of note is the strong relationship between the number of listed companies and output performance. It was found in this study that privatisation, as partially measured by a number domestic of companies, and had a positive effect on GDP growth. It thus goes without saying that African governments could consider privatising state owned enterprises through the stock market as well as encouraging large corporations to list on local bourses, so as to improve domestic liquidity and resource allocation. This in the long term will attract foreign investors, which will in turn boost the economy.
Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2014.