Commentary
By Dr. John Mannah, USA.
It is heartening to know that Sierra Leone is finally on her way to launching the Stock Market that was initiated by the outgone SLPP government of President Kabbah. It is a bold idea, especially in an era of financial globalization and liberalization of financial markets that has brought macroeconomic stabilization and structural reform policies to the Sierra Leonean socio-economic landscape.
Financial markets like the stock market is a place where funds are transferred from people who have an excess available fund to those who have a shortage of such funds. Stock markets are crucial to promoting greater economic efficiency by channeling funds from people who do not have a productive use of them to those who do. Indeed well functioning financial markets are a key factor in producing high economic growth, and poorly performing ones, are one reason that many countries in the world like Sierra Leone remain desperately poor. Activities in financial markets also have direct effects on personal wealth, the behavior of businesses and consumers, and the cyclical performance of the economy.
Sierra Leone is therefore faced with a tremendous opportunity, especially in the wake of the turbulence of the mainstream western stock markets, and the low yields offered by the traditional safe haven government debt of the United States, Europe and Japan. This has left institutional investors with little option but to take defensive measures. With the appetite for little more risk in their search for decent earnings, the stock market in Sierra Leone offers real opportunities.
Another advantage the stock market in Sierra Leone will have over major emerging markets in South America, notably Brazil and Argentina, the East Asian Emerging markets of Hong Kong and Taiwan are their “correlation coefficients” with the New York and Tokyo stock exchanges. This means that they will rally or nose-dive broadly in line with the overall trading environments in the US and Japan.
By contrast, the stock market in Sierra Leone will be less integrated within the global marketplace and less exposed to adverse external shocks such as adjustments to interest rates or major corporate bankruptcies. As a matter of fact, the exposure to the Sierra Leone stock market would be highly suitable as part of a risk diversification strategy for foreign investors because the Sierra Leone stock market will be semi-detached from the stock markets of the developed world.
Moreover, capital flows and market fundamentals, rather than speculative trade driven by derivative products, options and futures where most western hedge funds make their money will more readily affect Sierra Leonean stock market share prices.
Stock markets however, before they take advantage of the benefits listed above should be liquid as well as efficient. By liquidity is meant the relative ease and speed with which an asset can be converted into a medium of exchange i.e. investors should be able to readily sell their shares when they deem fit without any internal or external hindrance.
The other fundamental concept that is most important for the success of a stock market is, in the rational expectations paradigm, the pricing of securities. Thus financial economists developed the efficient market hypothesis. It is based on the assumption that prices of securities in financial markets fully reflect all available information. It views expectation of future prices of securities as equal to optimal forecasts using all currently available information. In other words, the markets expectations of future prices being rational has a tendency to head towards the equilibrium return that equates the quantity demanded to the quantity supplied.
The factors that determine the equilibrium returns on securities are risk and liquidity. This is where the S/Leone stock market is going to fall short because of the inherent political risk that continues to permeate its socio-economic environment.
Before countries trade or invest in a foreign country today, there is a penchant enquire for information on the operating environment in the country where they make their investment. In addition to assessing economic and social developments, they also assess the political conditions and risks that prevail in the environment. Political risk is defined as the risk or probability of occurrence of some political event that will change the profitability of a given investment. Thus uncertainty in the socio-economic environment factor in here more than any other variable. Thus reason to worry about the situation that obtains in S/Leone today.
The current president of S/Leone came to power a year ago, with goodwill and tremendous confidence from a section of the S/Leonean people. There was real optimism and hope by the people for a better future through well thought out policies that will impact positively on their lives. Alas, however, after more than a year in office, the reality on the ground is different. This president has been the most divisive and manipulative chief executive the country has ever had. He has no respect for democratic and constitutional norms as is manifested in his sacking of competent people from their positions of work. A case in point is the removal of the Governor of the Central bank of Sierra Leone, Dr. James Rogers before the expiration of his term of office. So also did it go for Chief Justice Ade Renner.
Tribalism, regionalism, incompetence, and lack of public accountability and probity are synonymous with the leadership of the first year in office of president Koroma. Whether it is the IMF country report on the performance of the APC government under president Koroma, or Transparency International declaring S/Leone as even more corrupt than any time in her history, the story is the same.
Chartam House could not have said it better: “that the APC government was never ready to govern and therefore have very little ideas about policy initiatives”. The ACC report that exposed the fraudulent and unethical Income Electric deal, the $25 million dollar fraudulent payment to Wanza for a gunboat that never reached the shores of S/Leone or the president’s brother establishing a rice importing company without any tangible capital or qualification leads to the same result, corruption, dishonesty and poor stewardship of the ship of state. No wonder Transparency International just declared S/Leone as more corrupt under the one-year leadership of the APC government than at any other time in her history.
The brutal attack by APC loyalists and task force members on the opposition party offices, properties and persons with the complicity of the national police force are a cause for concern and worry for S/Leoneans. Did I forget to mention the Kangaroo court that has been established to intimidate members of the SLPP, with an aim of discrediting potential opponents for the 2012 elections? It’s a distraction Mr. President. These types of tactics are not going to work this time. It creates uncertainty in the system that will scare investors away, and is part of what exacerbates the political risk I have discussed.
Prevalent financial corruption denies the people the necessary funds or disposable income that will allow them save via the stock market by buying financial assets like stocks and bonds thereby enhancing the necessarY liquidity of the stock market.
All the issues that have been mentioned above suggest that the consideration of the issue of estimation risk is crucial in estimating the benefits of portfolio investment in high political risk countries like S/Leone. When one therefore captures the political risk variables and weight them statistically and run a regression analysis, in a mean-variance analysis, one would end up with the conclusion that the S/Leone stock market will be a highly volatile stock market because of the inherent political risk and thus diversification will not benefit an investor that will consider the S/Leone stock market as an emerging stock market to invest in, with an aim to make use of the benefits of international portfolio diversification, that of risk minimization and return maximization.
The political risk to foreign investment I have just illustrated that confronts the S/Leone stock market is serious and will dampen the enthusiasm for international diversification. While the risk is extremely small in the major markets and other emerging markets, it is huge in S/Leone, and the associated potential loss is colossal. Imagine how much S/Leone stands to gain if we are able to engender the right political environment by respecting the rule of law and democratic norms, minimize corruption and encourage financial accountability and probity. It’s therefore not too late for president Koroma to change course and take a cue from what has just transpired in the United States in the election of the first African American to the leadership of the greatest country in the world.
Barack Obama was elected overwhelmingly across the board in these United States because of his brazen brilliance, unifying message and humility. It is ideas that do these things today, not malice and force. Political opponents are not enemies, but competitors, and president Koroma should be able to disagree without being disagreeable with his political opponents in the national interest. The president should clean up the ship of state, and take better stewardship of this ship, so as to allow the country take advantage of the opportunities international portfolio flows offer today in huge investments by institutional investors looking for investment opportunities to diversify their portfolios and investments.
If the president does do not correct course, no amount of chicanery, salesmanship or manipulation will get him the job of the presidency of Sierra Leone in 2012. Putting the modalities in place and making sure that the S/Leone stock market is liquid, viable, efficient and thereby successful with the concomitant gains, will surely get him a chance at re-election come 2012.
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