Milken Institute

CAPITAL ACCESS INDEX
EMERGING AFRICA?
November 9, 1999
Number 5
GLENN YAGO, JUAN MONTOYA, MADANI TALL, CHRISTIAN YOKA, AND THOMAS MIMS
BY
CAPITAL ACCESS INDEX: EMERGING AFRICA?

November 9, 1999
By Glenn Yago, Juan Montoya, Madani Tall, Christian Yoka, and Thomas Mims
Capital Access Index: Emerging Africa?
Milken Institute - November 9, 1999
ACKNOWLEDGMENTS
Thanks to Aaron Pankratz and Lalita Ramesh for their help on this publication.
Copyright 1999 by the Milken Institute.
Milken Institute 1250 Fourth Street Santa Monica, California 90401-1353 For complete ordering information for this and all Milken Institute publications, please see our Web site at www.milken-inst.org or contact us by email (publications@milken-inst.org), telephone (310.998.2600), or in writing.
he Milken Institutes mission is to explore and explain the dynamics of world economic growth. Our goal is to provide understanding of and insights into the effects of economic, political, technological, and regulatory changes on the world economy and its societies as a basis for better public policy.
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EXECUTIVE SUMMARY
or years, some have hailed Africa as a land of unexploited opportunities for investors. International press coverage of famine, drought, and warfare and economic fundamentals such as dependence on commodity exports has led to dashed hopes and skepticism. Yet, mostly unreported, pockets of stability and reform are beginning to lead to renewed hope for an economic recovery of the continent. Some economists believe that lower-income countries should catch up and do better in the medium run as they close in on technological and other advances of industrialized nations. Is Africas emergence finally at hand? The Milken Institute examined 11 of the countries on the continent that possess stock exchanges and ranked them in order of ease of access to domestic and international capital. The Index shows regional giant South Africa on top, followed closely by fundamentally sound Egypt and liberalizing Mauritius. Bringing up the bottom of the list are stalled Kenya, internationally adventurous Zimbabwe, and Zambia, which has been dependent upon crisisridden Asian markets. Several major trends arise from the study: I Political and civil unrest (or the threat of such) remains the single largest concern for foreign investors. I African nations need and are trying to attract massive capital investment in order to diversify their primary-sector-dominated economies; local savings are insufficient for restructuring. I The degree of development of African stock exchanges varies widely. Stock market development to some extent mirrored economic downturns in 1998 (see figures 16); excluding South Africa, bourses posted modest gains of around 3.4 percent on average. In 1998, natural disasters and terms of trade deterioration took their toll, and foreign portfolio investors frowned on the corruption and 1 III
Pockets of stability and reform are beginning to lead to renewed hope for an economic recovery of the continent.
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The Index shows South Africa on top, followed by Egypt and Mauritius. Bringing up the bottom are Kenya, Zimbabwe, and Zambia.
Political and civil unrest remains the single largest concern for foreign investors.
Long-term benefits could result from current reforms such as the abolition of exchange controls and the lifting of investment restrictions.
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problems with property rights enforcement which plague some countries on the continent. Nevertheless, long-term benefits could result from current reforms such as the abolition of exchange controls and the lifting of investment restrictions. Signs of Africas potential recovery are indicated by the following: I In the last four years, three-quarters of countries in the region posted positive growth. I Inflation rates have converged to manageable levels (Figure 7). I Real interest rates, while still volatile, have remained manageable (Figure 8). I Regionally focused mutual funds have begun to perform well. I Ghanas bourse jumped 62.3 percent in dollar terms during 1998. I The role of foreign governments and organizations will continue to make a big difference. The United States passed the Africa Growth and Opportunity Act on July 16, 1999, earmarking over $2 billion for investment in the region. And the IMFs strict terms of lending have prompted economic reforms, including privatization and liberalization. Of course, only time will tell if these positive (and negative) trends will continue in the long run. If markets are efficient, the greater risk of investing in Africa will be rewarded with greater returns.
In the last four years, three-quarters of countries in the region posted positive growth, and inflation rates have converged to manageable levels.
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Real interest rates have remained manageable, and regionally focused mutual funds have begun to perform well.
CAPITAL ACCESS INDEX

MILKEN INSTITUTE CAPITAL ACCESS INDEX Ranking of African Capital Markets
Country South Africa Egypt Mauritius Botswana Morocco Cte d Ivoire Ghana Nigeria Kenya Zimbabwe Zambia Rank 1 2 3 4 5 6 7 8 9 10 11 Overall Score 100.0 98.2 96.4 87.2 86.7 80.8 77.9 75.8 69.8 66.7 59.8 Quantitative Score 100.0 99.7 96.9 87.2 80.1 81.6 73.7 76.4 65.5 65.8 59.4 Risk Score 91.7 100.0 94.1 90.8 94.9 93.9 91.2 98.4 88.5 49.3 35.9 Qualitative Score 96.9 88.6 90.8 100.0 93.5 70.5 78.8 63.2 69.5 70.3 64.4
The Milken Institute Capital Access Index is a weighted index of 29 variables, divided into three categories: Quantitative, Qualitative and Risk
Quantitative Measures
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. GDP per Capita Government Spending/GDP Claims of Non-Financial Private Sector/GDP Total Reserves/GDP Average GDP Growth Inflation Rate Equity Market Cap/GDP Firm Concentration Ratio Equity Market Liquidity Foreign Investment Ceiling Short-Term Interest Rate Corporate Income Tax Capital Gains Tax Value Added Tax Bank Assets/GDP Bank Concentration Ratio Foreign Direct Investment/GDP Qualitative Measures 23. 24. 25. 26. 27. 28. 29. Risk of Expropriation Risk of Contract Violation Rule of Law Principles Corruption Perception Index Composite ICRG Rating Institutional Investor Credit Rating. Euromoney Country Credit Worthiness Rating Risk Measures 21. 22. Currency Volatility Foreign Exchange Parallel Market Premium 18. 19. 20. Portfolio Investment Flows (Stock)/GDP Portfolio Investment Flows (Bonds)/GDP Gini Index
For definitions of variables, please see the appendix.
AFRICAN STOCK MARKETS BY COUNTRY
If our expectations, if our fondest dreams are not fulfilled

then we should all be reminded that the greatest glory in living lies not in never falling but in rising up every time you fall. Nelson Mandela
INTRODUCTION
Realizing the urgent need for massive capital investment, African authorities have been busy creating new stock exchanges and upgrading the existing ones in a race to attract funds. African countries have begun to court international institutional and corporate investors alike as they attempt to diversify their commodity-producing economies, which have been hard hit not only by such natural fluctuations as El Nio and La Nia but also by fluctuations such as falling commodity prices. Countries that had exchange controls abolished them, and those with investment restrictions either eliminated or eased them. However, problems persist. In many cases, countries are plagued with corruption, social unrest, and political instability, which often cause investors to think twice before committing their resources to the region, even when lured by potentially high returns. With the exception of securities listed in the Johannesburg Stock Exchange, the Asian crisis did not severely affect the value of most stocks in the region. While the weighted loss of all African stock exchanges in 1998 was -10 percent, excluding South Africa yields a return rate of +3.4 percent. This dramatic difference is due to South Africas 27.6 percent decline during the period and to its importance in the region. The slow growth of the other African bourses is due to the economic downturns in 1998 suffered by their host economies. Natural disasters and the deterioration of the terms of trade for African products were the main causes for these downturns. While prices for the primary commodities exported by African countries were under pressure in international markets, the prices for African imports from developed countries tended to increase, as African
African countries have begun to court international institutional and corporate investors to diversify their commodity-producing economies.
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Countries that had exchange controls abolished them, and those with investment restrictions eliminated or eased them.
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The slow growth of African bourses is due to the economic downturns in 1998 suffered by their host economies. Despite these, the average return for the first half of 1999 was 5.4 percent.
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countries demanded goods that were more technologically intensive. Despite these problems, the average return for all African
Figure 1 Egypt: EFG Stock Exchange Index (in US$)
Sources:Milken Institute, Bloomberg, and Financial Times
Figure 2 Kenya: Nairobi Stock Exchange Index (in US$)
markets for the first half of 1999 was 5.4 percent. Figures 1 through 6 indicate the timeline events that have roiled African Markets.
Figure 3 Mauritius: SEMDEX Stock Exchange Index (in US$)
Sources: Milken Institute, Bloomberg, and Financial Times
Figure 4 Morocco: CFG25 Casablanca SE Index (in US$)
Figure 5 South Africa: Johannesburg Stock Exchange Index (in US$)
Figure 6 Zimbabwe: Stock Exchange Industrial Index (in US$)
THE AFRICAN ECONOMY

The African economy is largely dependent on the exploitation of natural resources like petroleum, diamonds, gold, cocoa, coffee, and timber. Because these are commodity items that have little value added and show little to no differentiation from those of other producing countries, they are subject to price fluctuations fueled by supply and demand as well as by speculation. Therefore, economic performance in the region is dependent on the development of commodity prices in the international markets. Furthermore, since the production of many of these commodities, particularly those that come from agricultural activities, are subject to exogenous shocks such as floods and droughts, they also are subject to the natural cyclical fluctuations in crop yields over time. With the uncertainties created by these fluctuations in both prices and yields, African authorities have difficulties forecasting budgets, let alone meeting them. Furthermore, because budget expenditures are for the most part fixed, and therefore do not vary proportionately with income, fiscal shortfalls can appear with very little notice. Under these circumstances, the stable growth of these economies is far from guaranteed. Recognizing the need to diversify their economies in order to reduce the effect of these uncertainties and to support a period of sustainable long-term growth, African authorities have begun to court investors to finance new projects. However, average savings in the region represents only about 17 percent of gross domestic product (GDP) barely enough to support the level of investment necessary to sustain growth. The regional savings rate not only was inferior to the averages seen in developed countries (24 percent) but also was insufficient to finance investments crucial to rapid and sustained economic expansion. Therefore, African authorities have realized the necessity of creating an environment attractive to foreign investors. With this goal in mind, they have implemented such macroeconomic reforms as eliminating foreign exchange controls and cutting interest rates. These reforms already have begun to pay off. During the past four years, 75 percent of African countries registered positive growth despite 30 percent of them having been in recession at the beginning of the 1990s. Gross domestic product grew 3.7 percent in 1997, 5 percent in 1996, and an average of 1.9 percent between 1990 and 1995 in real terms. Furthermore, inflation rates for the African
The African economy is largely dependent on the exploitation of natural resources, which are subject to price fluctuations.
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With the uncertainties created by these fluctuations, authorities have difficulties forecasting budgets, let alone meeting them.
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Since the regional savings rate was insufficient to finance investments crucial to economic expansion, authorities have realized the necessity of creating an environment attractive to foreign investors.
Macroeconomic reforms already have begun to pay off. Inflation rates have started to converge toward more manageable levels and interest rates have remained reasonable, in spite of some volatility.
countries in our study have started to converge toward more manageable levels (see Figure 7). For the most part, interest rates have also remained at reasonable levels, in spite of being very volatile in some countries such as Zimbabwe and Zambia (see Figure 8).
Figure 7 Inflation Rates are Converging Toward Manageable Levels
Figure 8 Volatile Interest Rates in Some African Countries Affect Investors
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While growth remains fragile and the socioeconomic difficulties of the past 20 years are still far from being overcome, it is hoped that economic reforms and progress toward political stability might open encouraging avenues for investment on the continent. Meanwhile, the U.S. government is actively formulating an African policy that encourages U.S. trade and investment in the region. President Clintons extended visit to Africa and the growing number of reciprocal U.S.African trade missions and diplomatic visits all attest to the higher profile of todays Africa and seem to presage an explosion of foreign investment there. On July 16, 1999, the U.S. government passed the Africa Growth and Opportunity Act (AGOA) which earmarked over $2 billion for investment in the region. In addition, the economic policy reforms undertaken in many of these countries with IMF assistance are beginning to produce results. In accordance with standard IMF directives, these reforms included the transition toward more liberalized economies. Between 1997 and 1998, the process of privatization accelerated, with South Africa and Zambia expected to accomplish the most in the near future. For instance, in April 1997, the South African government sold 30 percent of National Comp Telkom to Thurtana Communication, a group formed by SBC Com, Telkom Malaysia, and BHD.
The U.S. government is actively formulating an African policy that encourages U.S. trade and investment in the region.
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CAPITAL MARKETS
African capital markets have developed unevenly. Countries like South Africa and Egypt, which ranked numbers one and two, respectively, in the African Capital Access Index, have developed capital markets that have enabled them to attract large amounts of foreign capital. (Together with Zimbabwe, these countries possessed stock exchanges since the last century. Egypts stock exchange was founded in 1883, South Africas in 1887, and Zimbabwes in 1896.) But for the most part, stock markets in African countries have been anything but active. Most of these exchanges have individual market capitalization of less than $3 billion (see Table 1). Some markets hold less than several hundred million dollars. According to International Finance Corporation estimates, portfolio investment flows into the region have doubled every year since 1991, reaching $2 billion in 1998.
In addition, the economic policy reforms undertaken in many of these countries with IMF assistance are beginning to produce results.
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Portfolio investment flows into the region have doubled every year since 1991, reaching $2 billion in 1998
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Table 1 Market Capitalization of the Main African Stock Exchanges
Many of the regions stocks are in the hands of institutional investors, which has exacerbated already low levels of liquidity; African bourses are among worlds most illiquid.
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In the longer term, African bourses will deepen, become more liquid, and will be integrated more fully into global capital markets, thus becoming more vulnerable to the tide of capital flows.
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However, in terms of portfolio investments, African equity markets generally have attracted a different breed of investor. These markets have not to date lured the so-called hot money, or highly volatile short-term funds that many analysts have blamed for exaggerating the peaks and troughs of equity investment elsewhere. Instead, many of the regions stocks are in the hands of institutional investors following a buy-and-hold strategy, including governments maintaining minority holdings and those involved in management. While such investors offer some stability to share prices, the downside is that the long-term view that informs their decisions has exacerbated already low levels of liquidity. In fact, the extremely low liquidity levels of most African stock exchanges African bourses are among worlds most illiquid are often cited as a major barrier to market expansion. (As shown in Table 1, seven of the 11 countries in the study had annual turnover ratios of less than 10 percent.) Yet, they can also act as a buffer against share price volatility. In the longer term, as African markets attract a wider range of international investors and, crucially, as a domestic middle class emerges thus raising local demand for shares, African bourses will deepen, become more liquid, and will be integrated more fully into global capital markets. The continents stock exchanges will thus become more vulnerable to the tide of capital flows.
WHY AFRICA?
Tangible signs of Africas emergence as an attractive investment site are manifest in the returns of some of the U.S. investor funds specializing in African stocks. At the head of the pack is Morgan Stanleys Africa Fund, which reported average annual returns of 10.3 percent during the last five years. Other Africa-focused funds posted generally respectable returns as well, with the Africa Emerging Markets Fund yielding an average 8.14 percent during the same period. While these returns are not comparable to the S&P 500s 26 percent gain in the same period, they are far better than the average return of just 1 percent achieved by all other emerging markets. The financial turmoil in Asia does not appear to have had any significant impact on African financial markets, and there are even indications that Asian capital is increasingly finding its way to Africa. The Ghanaian market turned in a particularly spectacular performance in 1998, climbing 63.1 percent in U.S. dollar terms (Table 2). Furthermore, during the same year, over half of the stocks on the Ghana Stock Exchange registered more than a 50 percent gain and several stocks registered gains of over 100 percent. While shares are still relatively cheap, liquidity remains low and a limitation on foreign holdings per company to 74 percent makes obtaining shares somewhat difficult. However, the privatization process of three state-owned enterprises which began in 1998 and continues throughout this year will help boost market liquidity. New investors seeking to engage with the African stock markets quickly discover that reliable information on Africas capital markets is scarce or nonexistent. Investment capital is risk averse, so the availability and depth of relevant information is crucial to the decision to invest. With few exceptions, the Wall Street community has yet to begin to look seriously at Africa, especially sub-Saharan Africa, as a place to put money. The prevailing misconception and negative images concerning Africa fostered by the news media are responsible for many an excellent investment opportunity being overlooked by the U.S. investment community. Lurking behind the sensational headlines focused on bloody conflicts that have infected parts of Africa are thriving enclaves of peace, steady economic growth, and high returns on investment. In many countries of the continent,
Africas emergence as an attractive investment site is manifest in the returns of some of the U.S. investor funds specializing in African stocks.
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The Ghanaian market turned in a particularly spectacular performance in 1998 climbing 63.1 percent in U.S. dollar terms.
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Reliable information on Africas capital markets is scarce or nonexistent despite its crucial importance to investment decisions.
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Table 2 US$ Returns of African Stock Exchanges as of June 30, 1999 (in Percentages)
Lurking behind the sensational negative headlines, there are thriving enclaves of peace, steady economic growth, and high returns on investment.
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In many countries of the continent, business, fueled by privatization, democracy, and capitalism, is roaring ahead as if to make up for lost time.
*Weighted by market capitalization **Morgan Stanley Capital Index (MSCI).
business, fueled by privatization, democracy, and capitalism, is roaring ahead as if to make up for lost time. Although Africas foreign debt obligations remain high, serious international efforts are finally under way to shrink them to manageable size. In the United States, the Human Rights, Opportunity, Partnership and Empowerment (HOPE) for Africa Act being debated in Congress includes provisions to repurchase and cancel part of Africas $230 billion external debt.
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PLAYING CATCH-UP
Europe and South Africa have been the architects and key operators of the African stock markets, and their financiers have made little effort to share strategic African capital market information and data with their American counterparts. Now, with the economic unification of Europe a reality, non-European investors will be forced to become aware of and active in the African capital markets or else be only peripheral players in it. The success of Morgan Stanleys Africa Fund is an example of what can happen when American money managers get involved in the African capital market.
Europe and South Africa have been the architects and key operators of the African stock markets. Now, non-European investors will be forced to become aware of the African capital markets or else be only peripheral players in it.
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The Capital Access Index examines the availability of capital, the distribution of wealth in society and its impact on economic growth.
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THE CAPITAL ACCESS INDEX

Introduction to the Milken Institutes Capital Access Index
The Capital Access Index examines the availability of capital, the distribution of wealth in society, and its impact on economic growth. In order to capture these relationships and indicate which countries have the institutional framework and macroeconomic policies that are most likely to sustain economic growth, the regional Capital Access Index ranks the various countries in Africa. The Index is constructed using 29 equally weighted variables, separated into three categories: quantitative, qualitative, and risk variables. The quantitative variables include equity market capitalization/GDP, equity market liquidity, and several macroeconomic indicators. We believe that the broader and deeper a countrys debt and equity markets are, the more entrepreneurial activity will be financed and the higher the quality of price information feeding back into the economy. The second category, qualitative variables, comprises a set of subjective evaluations and ratings by different organizations that measure corruption, risk of expropriation, and risk of contract violation, among others. To the extent that private economic activities can be performed in a transparent environment, true entrepreneurial activity is more likely to evolve. The last category, risk variables, measures indicators such as currency volatility and foreign exchange parallel-market premium. To the extent that volatility in foreign exchange or interest rates exists, the ability of individuals and corporations to make economic forecasts is impaired. This inability leads them to shorten their horizon and makes them less willing to invest in long-term projects. In addition, the parallel-market premium is an indicator of the extent to which the economic environment could lead to a deviation between the official and parallel-market exchange rate, and is a reflection of unsound macro policies.
The broader and deeper a countrys debt and equity markets are, the more entrepreneurial activity will be financed and the higher the quality of price information feeding back into the economy.
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To the extent that private economic activities can be performed in a transparent environment, true entrepreneurial activity is more likely to evolve.
Africa and the Index

Not surprisingly, South Africa ranked number one in the Milken Institutes Capital Access Index. This country is host to the Johannesburg Stock Exchange (JSE), the largest stock market on the African continent, with a market capitalization three times larger
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Figure 9 The Johannesburg Stock Exchange Accounts for the Lions Share of Africas Stock Market Capitalization
Not surprisingly, South Africa ranked number one. As of year-end 1998, the JSE listed 668 companies, both foreign and domestic.
III than those of all the other African equity markets combined (see Figure 9). As of year-end 1998, the JSE listed 668 companies, both foreign and domestic. By African equity market standards, the JSE liquidity of 30.4 percent is high, closely followed by Egypts CairoAlexandria combined stock exchange (see Table 1). South Africa is also host to a very large banking sector with total assets equivalent to 83 percent of the countrys GDP and a very low bank concentration ratio (0.34). The existence of relatively well-developed financial markets, supported by a legal system that protects private investment, has enabled South Africa to sustain economic growth. However, a cause for concern on the part of foreign investors is South Africas income tax rate (40 percent) and foreign exchange rate volatility (0.16), which are high compared with the other countries in the study. High interest rates have been blamed for stifling domestic demand, which caused South Africas mining, construction, and manufacturing activities to decline. In contrast, Zambia and Zimbabwe fared worst in the study. With high inflation (24.81 percent and 18.74 percent, respectively), high interest rates (31.80 percent and 42.06 percent, respectively), high 17
In contrast, Zambia and Zimbabwe fared worst in the study. With high inflation, high interest rates, high currency volatility and high foreign exchange parallel-market premiums, these countries have little security to offer.
The African bond market is, at most, very thin.
currency volatility (0.31 and 0.59, respectively) and high foreign exchange parallel-market premiums (32.00 percent and 14.00 percent, respectively), these countries have little security to offer to potential investors. Furthermore, Zimbabwes military involvement in the Democratic Republic of Congo ruined its relations with the IMF, leaving it without international donor support. This may prove costly as the possibility of a recession enters Zimbabwes horizon. In general terms, it is interesting to note that the African bond market is, at most, very thin. For most countries, we can find no information at all regarding the existence of issued bonds. The combination of two factors inhibits a substantial bond market to flourish. First, high interest rates associated with a high level of volatility makes both potential issuers and investors unwilling to consider medium- and long-term fixed income securities. Second, short-term lending rates in seven of the countries in the study were above 19 percent, with Zimbabwe boasting a high of 42.06 percent, closely followed by Ghana (37.00 percent) and Zambia (31.80 percent). Even though these interest rates are a function of high inflation rates, which leave African real interest rates at levels comparable with the rest of the world, high nominal rates put a tremendous strain on cash flows and make many projects impossible to finance. However, for most countries, the economic situation seems to be improving. Annual inflation rates in seven out of the 11 countries were single digit. Morocco in the low end registered a rate of only 0.89 percent, and Ghana in the high end had a rate of 27.89 percent, which was closely followed by those of Zambia (24.81 percent) and Zimbabwe (18.74 percent). As African countries continue to focus on sound macroeconomic policies and improve the conditions that reduce the risk for investors, the continent should see growing pools of incoming investment funds.
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For most countries, the economic situation seems to be improving. As they continue to focus on sound macroeconomic policies, they should see growing pools of incoming investment funds.
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Creating value in Africa is possible by pursuing investment opportunities resulting from corporate restructuring, realignment, and privatization programs.
New Directions
Private equity and structured finance opportunities have remained largely unexplored in Africa. Divestiture opportunities from privatization efforts and natural resource-based securitization are beginning to develop. Creating value in Africa is possible by pursuing investment opportunities resulting from corporate restructuring, realignment,
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and privatization programs. If carefully selected and intensively managed following acquisition, many companies can provide the potential returns emerging-market investors require. A characteristic common to divestitures is that the businesses offered for sale have been neglected by senior corporate management in the years preceding their sale or privatization. Special emphasis should be then placed on modifying the strategic direction of the business, rationalizing its cost structure, and encouraging the resumption of growth through new product introduction or add-on acquisitions. The introduction of these companies on stock exchanges will create a new dynamic of growth, innovation, and wealth creation. Further enhancements are expected to result from the securitization of these countries debt, and also from mining, energy, and agricultural resources. Recently, Mobil closed a securitized transaction on oil revenues in Nigeria with Credit-Suisse First Boston as the lead investment banker in its operation. A similar deal was the structured finance operation of Merrill Lynch on bauxite from Guinea, a transaction that was sold to the international investment community through Merrills Mercury Fund. The nascent American depository receipt (ADR) market represents another opportunity. There are about 100 African companies trading on U.S. stock exchanges using ADRs. Of that number, only four are non-South African: Ashanti Goldfields of Ghana (now on the NYSE), Botswana RST Ltd. (trades on the pink sheets), Mangura Copper Mines, Ltd., and United Bank of Africa (UBA), one of the four largest banks in Nigeria, which recently became listed on the London Stock Exchange. Furthermore, UBA has secured the approval of the Securities and Exchange Commission to have its shares listed in the United States. Financial technology, including ADRs, needs to be implemented across the continent in order to (directly and indirectly) add liquidity to the capital markets.
Further enhancements are expected to result from the securitization of these countries debt, and also from mining, energy, and agricultural resources.
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The nascent ADR market represents another opportunity and, with other financial technologies, can indirectly add liquidity to the capital markets.
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APPENDIX: DEFINITIONS OF VARIABLES

Quantitative Measures
(1) GDP per Capita. GDP divided by mid-year population. Source: World Bank 1999. (2) Government Spending/GDP. Source: IMF 1999. (3) Claims of Non-Financial Private Sector GDP. Source: IMF 1999. (4) Total Reserves/GDP. Total reserves minus gold. Source: IMF 1999. (5) Average GDP Growth. Average GDP growth from 1993 to 1997. Source: IMF 1999. (6) Inflation Rate. Annual inflation. Source: World Bank 1999. (7) Equity Market Cap/GDP. Sum of market capitalization of all firms listed on domestic stock exchanges, where each firms market capitalization is its share price at the end of the year times the number of shares outstanding. Sources: IFC 1999 and IMF 1999 (GDP data). (8) Firm Concentration Ratio. Market capitalization of 10 largest listed companies in the stock market divided by total market capitalization. Source: Irish 1998. (9) Equity Market Liquidity. The dollar volume of shares traded divided by equity market capitalization. Source: IFC 1999. (10) Foreign Investment Ceiling. The maximum percentage of ownership allowed in any particular company. Sources: IFC 1999; Irish 1998. (11) Short-Term Interest Rate. The short-term interest rate ranged from the three-month offer rate or discount rate or prime rate, depending on country. Sources: IFC 1999; Datastream. (12) Corporate Income Tax. Highest income tax rate applied in the country. Sources: Holmes et al. 1999; IFC 1999; Ernst and Young Country Guides. (13) Capital Gains Tax. The tax on capital gains. Sources: Laffer Associates, Alexis de Tocqueville Institute; Irish et al. 1998. (14) Value Added Tax. Source: Holmes et al. 1999; Ernst and Young Country Guides. (15) Bank Assets/GDP. The total assets of all commercial banks in the country. Source: Gladstone & Barrington; IMF 1999. (16) Bank Concentration Ratio. Source: Gladstone & Barrington. (17) Foreign Direct Investment/GDP. Net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor, relative to the host economys GDP. Sources: World Bank 1999; IMF 1999. (18) Portfolio Investment Flows (Stock)/GDP. Net flows of non-debt-creating portfolio equity flows (the sum of country funds, depository receipts, and direct purchases of shares by foreign investors) relative to the size of the host economy, as measured by its GDP. Sources: World Bank 1999; IMF 1999. (19) Portfolio Investment Flows (Bonds)/GDP . Net flows of bond issues purchased by foreign investors relative to the size of the host economy, as measured by its GDP. Sources: World Bank 1999; IMF 1999. (20) Gini Index. Measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution. An index of zero represents perfect equality while an index of 100 measures perfect inequality. Source: World Bank 1999.
Risk Measures
(21) Currency volatility. Standard deviation of data from June 1995 to present divided by the mean of all data points on exchange rates. Source: Datastream. (22) Foreign Exchange Parallel Market Premium: The percentage difference between the official exchange rate and the parallel market rate.
Qualitative Measures
(23) Risk of Expropriation. The likelihood that ones
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property might be expropriated (10 = best, 1 = worst). Sources: Gwartney and Lawson 1998; PRS Group 1998. (24) Risk of Contract Violation. The degree to which foreign businesses, contractors, and consultants face the risk of a modification in a contract taking the form of repudiation, postponement, or scaling down. (10 = best, 1 = worst). Sources: Gwartney and Lawson 1998; PRS Group 1998. (25) Rule of Law Principles. The degree to which the citizens of a country are willing to accept the established institutions to make and implement laws and adjudicate disputes. Nations are given a higher score for the rule of law component when sound political institutions, a strong courts system, and provisions for an orderly succession of power are present. Lower scores indicate a tradition of depending on physical force or illegal means to settle claims (10 = best, 1 =
worst). Sources: Gwartney and Lawson 1998, PRS Group 1998. (26) Corruption Perception Index. Based on survey results on perceptions of corruption from local and foreign business executives. (10 = least corrupt, 1 = most corrupt) Source: Transparency International and Goettingen University 1999. (27) Composite ICRG Credit Rating. An overall index, ranging from 0 to 100, based on 22 components of risk. Source: PRS Group 1998. (28) Institutional Investor Credit Rating. Ranks from 0 to 100 the chances of a countrys default. Source: World Bank 1999. (29) Euromoney Country Credit Worthiness Rating. Ranks from 0 to 100 the riskiness of investing in an economy. Source: World Bank 1999.
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REFERENCES
Bloomberg Online. www.bloomberg.com Datastream Online. www.datastream.com Gladston & Barrington, Washington, DC. Gwartney, Jim, and Robert Lawson. 1998. Economic Freedom of the World Interim Report: 1998/1999. Vancouver, BC: The Fraser Institute. http://www.freetheworld.com Holmes, Kirm R., Bryan T. Johnson, and Melanie Kirkpatrick. 1999. 1999 Index of Economic Freedom. Washington, DC: The Heritage Foundation. International Finance Corporation (IFC). 1999. Emerging Stock Market Factbook 1999. Washington, DC: IFC. International Monetary Fund (IMF). 1999. International Financial Statistics. Washington, DC: IMF. August. Irish, Robert, et al., eds. 1998. The Salomon Smith Barney Guide to World Equity Markets 1998. London: Euromoney Publications PLC. PRS Group. 1998. International Country Risk Guide. East Syracuse, NY: PFS Group. Originally published in World Bank. 1999. The World Development Indicators 1999. Washington, DC: World Bank. Transparency International and Goettingen University. 1999. The Corruption Perception Index. July. http://www.transparency.de/documents/cip/index.html World Bank. 1999. The World Development Indicators 1999. Washington, DC: World Bank.
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COUNTRY BRIEFS BOTSWANA

Economic Summary and Outlook
Driven primarily by the diamond-producing activities of its mining sector, Botswanas real GDP growth is one of the most robust in the African region. The mining sector accounted for roughly 33 percent of the countrys GDP in 1996 and more than 74 percent of its exports in 1997. Furthermore, its contribution to the countrys real GDP is expected to continue to grow. However, in light of the economic slowdown of its main markets, namely the EU and Japan, the U.S. dollar value of diamond exports fell by an estimated 32 percent during 1998 to US$1.4 billion. Increasing levels of diamond output coupled with decreasing exports have led to inventory stockpiling. The outlook for 1999 is not favorable, as significant economic expansion in Japan is unlikely to materialize. The reduced level of exports was responsible for a decrease in government revenues, which were not sufficient to cover 1998s increasing expenditures, resulting in a fiscal deficit equivalent to an estimated 6.6 percent of GDP for the period 1998-99. One of the primary drivers of the increasing expenditures was a general wage increase averaging 25 percent in 1998. Regardless of this, civil servants continue to pressure the government for an additional wage increase. The fiscal deficit and the increased internal consumption fueled by higher wages were to blame for an increase in the inflation rate. The government must continue to take actions that lead to diversification of the economy. The expansion of infrastructure to support tourist activities should allow the country to decrease the importance of diamond exports as a source of revenue. Significant steps toward privatization already have been taken. The elimination of foreign exchange controls and foreign investment ceilings are moves that support the countrys intentions to become an international financial service center. Another pressing issue that the government must deal with is the high unemployment rate, which will require higher levels of private capital formation than heretofore achieved.
Rank 4
Score 87.2
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Quantitative Performance
Botswanas performance in the quantitative measures was above average, with 87.2 points. It had a combination of very good indicators with very bad ones. Its GDP per capita of US$3,290 was second only to Mauritius. It also had an impressive total reserve to GDP ratio of 116.33 percent, which was the highest of all the countries, with Egypt a distant second at 24.68 percent. On the other hand, Botswanas financial sector is, by comparison, weak. It has the third-lowest equity market capitalization-to-GDP ratio (12.96 percent) and the fourth-lowest bank assets-to-GDP ratio (25.24 percent). At 27.34 percent, its government spending-to-GDP ratio was the highest of all the countries in the study.
Risk Performance
In terms of risk indicators, Botswanas score was 90.80. Because Botswana, like many other emerging markets, has a rather high degree of foreign exchange volatility (0.15), it ranked eighth in this category.
Qualitative Performance
Botswana ranked first in this category, and received a score of 100. It is regarded as one of the most transparent countries on the African continent and has strong institutions. As indicated by many of the components in this category, business people perceive Botswana as one of the most transparent countries among those surveyed.
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CTE DIVOIRE
Cte dIvoires economy has been on an upward trend since the mid-1990s. Its average GDP growth is the highest in the Index, and its interest rate is the lowest. At the same time, the countrys inflation rate for 1998 fell to 4.7 percent, well below the average reflected in the Index. Cte dIvoires economy continues to be pushed by exports. Since 1996, exports have exceeded imports almost by a factor of 2, which has lead to a current account surplus for the past two years. Cocoa is the main agricultural crop of Cte dIvoire, comprising over onethird of its total exports. Unfortunately, the drop in world prices for the countrys top three exports (cocoa, oil, and coffee) led to a decrease in its total exports last year. Production for cocoa and coffee has now slowed. This will have a profound impact on the economy, since exports make up over 42 percent of Cte dIvoires GDP. Thus, the current account will move back into a deficit by the end of this year. The situation will also begin to adversely affect real GDP growth, which has averaged over 6 percent for the past three years. The government will attempt to maintain growth at about 5 percent for the next few years through an increase in spending. The IMF early this year criticized the governments handling of finances. The IMF was concerned about the reliability of the countrys federal data, its reform efforts, its large expenditures, and its slow movement toward privatization. In accordance with the IMF report, Cte dIvoire announced lower-than-expected revenues for 1998, and has begun internal audits of various ministries. It will see a budget deficit again this year. Cte dIvoire recently became host to a new regional stock exchange. The bourse, which includes listings from Benin, Burkina Faso, Mali, Niger, Senegal, and Togo, has not lived up to expectations since it opened in 1998. Hopes are high that it will perform better after a satellite trading system is implemented.
Rank 6
Score 80.8
Cte d Ivoire ranked sixth in the Milken Institute Capital Access Index. In terms of its quantitative performance, Cte d Ivoire scored 81.6 points, slightly over the average 80.6 in this category. In spite of 25
having the highest five-year average GDP growth among countries in the study, Cte d Ivoires GDP per capita ($719.25) is just above the average ($667) for the whole continent. This owes to the important contribution of commodity products such as cocoa, coffee, and petroleum (32.5 percent for 1996) to its gross domestic product. These products not only are low in value, but also are laborintensive. In terms of capital markets, the countrys financial institutions are relatively small when compared to the other countries in the study. Its equity market capitalization-to-GDP ratio is only 12.30 percent, just slightly above the lowest number (12.22 percent), registered by Nigeria. Market capitalization is also constrained by one of the lowest liquidity levels, 2.34 percent. In regards to its bank asset-toGDP ratio, Cte d Ivoires 29.46 percent is closer to the average among the study countries. Despite these difficulties, Cte d Ivoire enjoys one of the lowest inflation levels (5.61 percent) among countries and has the benefit of a very stable and low interest rate (6.25 percent).
Risk Performance
Cte d Ivoires risk performance was well above average with 93.9 points. The country has one of the lowest indexes of currency volatility (0.09) in the study, as well as a parallel currency market premium of only 2 percent the average for the countries in the study.
The qualitative performance score for Cte d Ivoire was only 70.5 points, well below the average score of 80.6. This is primarily a reflection of the perceived risk of investing and conducting business in the country. Among the primary problems that affect Cte d Ivoires reputation are corruption, risk of expropriation, and risk of contract violation. These problems could be the primary factors influencing the lack of liquidity suffered by the capital markets.
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EGYPT
Egypt makes itself attractive to foreign investors with an overall sound economy. It lays claim to the second-lowest inflation rate at 4.63 percent and the third-lowest interest rate at 13.02 percent in the Capital Access Index. Privatization programs are moving forward quickly, opening up new avenues of investment in the country. The UN Conference on Trade and Development has confirmed this by projecting a rise in foreign direct investment. Tight monetary policy kept inflation below 5 percent last year while tax rates and the stock market remained stable. This has allowed real GDP growth to stay above 5 percent since 1996, averaging 5.7 percent last year. Growth should accelerate to almost 7 percent by 2000. A possible new trade pact with the EU is part of an overall trade liberalization program envisioned by Egypt. This agreement would be the precursor to the Euro-Mediterranean free-trade area, which has a 2010 target date. The current proposed pact would prove beneficial to the petroleum sector of Egypts economy. Oil is Egypts largest export, accounting for one-fourth of all exports, while the EU is the recipient of one-third of all exports from Egypt. Progress here may hinge on the political success of the backers of this and other privatization issues. The cabinet has also set high growth rates for non-oil sectors of the economy in an attempt to provide more stable future growth. However, Egypt, along with South Africa, is home to the highest corporate income tax rate in the Index at 40 percent. The government needs to reduce its bureaucracy, stabilize its regulatory environment, and lower its corporate taxes if it is to secure future investment. Egypts budget will not meet its targeted revenue this year, leaving a deficit of almost 1.5 percent of GDP. Its current account deficit rose dramatically in 1998 to 3.7 percent of GDP from just 0.9 percent the year before. Much of this can be attributed to the fall in oil prices. This caused the value of Egypts oil exports to fall by fully 50 percent in 1997. Higher oil prices in the near future should help to reduce the current account deficit to below 3 percent by 2000. Import restrictions should also limit the growth of the deficit. Inflation may begin to rise slightly to about 4.5 percent by 2000. The pound will remain pegged to the dollar over that time period.
Rank 2
Score 98.2
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Egypt ranked second in the Capital Access Index with a total score of 98.2 points. The country has a large banking sector with total assets exceeding its GDP. However, and even though its equity markets are the second largest on the continent, accounting for more than 10 percent of the regions total market capitalization, the banking sectors size relative to the countrys GDP is small when compared with the equity markets of other study countries. In terms of liquidity, the Cairo-Alexandria combined equity markets are the second most liquid in the region (22.30 percent). Egypt also offers low interest rates (13.02 percent) and is subject to a normal inflation rate (4.63 percent). These conditions, in addition to other factors, give incentives to potential investors to allocate funds to Egypts capital markets.
Risk Performance
Due to having the lowest currency volatility of all countries in the study as well as no parallel foreign currency-market premium, Egypts score in this category is 100. The stability of its currency is one of the main factors contributing to the Egyptian stock exchanges ability to attract institutional investors.
Egypts score in the qualitative category was just above average (88.6). Given its perceived level of corruption, and in spite of having low risks of expropriation and contract violation, Egypts credit ratings are just above average, indicating some flaws in the countrys institutions.
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GHANA
Ghana faces many challenges in its attempt to create a sound economic environment. Many of the reforms needed to attract investors are dependent on political changes. Privatization, for instance, will be slowed due to governmental opposition. Additionally, improvement in many macroeconomic variables also is necessary for significant progress to be made. Ghanas inflation rate average is the highest in the Index. The rate for 1998 was just under 20 percent, but that figure is expected to rise again this year. The Ghanaian interest rate also remains very high, second only to Zimbabwes. The Bank of Ghana did cut its discount rate from 45 percent to 32 percent at the end of last year, however. Interestingly, Ghana averages the third-highest GDP growth of the 11 countries. Although growth in 1998 was less than 2 percent, growth could average 5 percent for the next two years. Still, GDP per capita ranks as the second lowest in the index. While the federal government continues to run a fiscal deficit, that deficit as a percentage of GDP should fall from 6.3 percent in 1998 to 5.2 percent this year. A value added tax was added this year in an attempt to increase revenue collection. Ghanas current account deficit should also fall this year as exports rise. Gold and cocoa comprise most of the countrys exports. Cocoa prices have fallen this year, which should lead to a slight drop in the agricultural growth rate by 2000. The current account deficit would then again begin to rise. Fortunately for Ghana, it maintains its good standing with the IMF, making it a great beneficiary of international donor funding. Its stock market is also booming. It grew 63 percent last year, outperforming all other sub-Saharan stock markets.
Rank 7
Score 77.9
The countrys score (73.7) in this category is below average, as it has both a high inflation rate (27.89 percent) and high interest rates (37 percent). Furthermore, its GDP per capita is only $375.36, which is substantially lower than the African continents average ($667.00). In terms of its financial institutions, the market capitalization-toGDP ratio of Ghanas stock exchange is just 18.09 percent. 29
Furthermore, like its other African counterparts, Ghanas stock exchange suffers from a very low liquidity level (4.80 percent). The size of the countrys banking sector relative to its economic activity as measured by its GDP is also among the lowest of the countries in the study. Finally, foreign investment in local companies is limited to 74 percent.
Risk Performance
Ghanas risk performance was above average, with 91.2 points. In spite of having a low by African country standards parallel currency market premium (1 percent), the foreign exchange rate volatility is very high (0.17).
The countrys score (78.8) in this category is slightly below average (80.6). Of particular relevance is its high level of corruption, even by African standards. In addition, the countrys credit ratings are among the lowest of the 11 countries in the study. In terms of its legal institutions, Ghana is generally perceived well by businesspeople. Its scores on variables measuring risk of expropriation, risk of contract violation, and rule of law principles are almost as good as the best countries in the study.
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KENYA
Kenya ranks ninth overall with a score of 69.8. In the past two years, its real GDP growth has averaged about 2 percent and should increase modestly to around 3 percent by 2000. Kenyas growth will continue to be limited, however, by a deteriorating infrastructure and lack of efficient transportation. Agriculture comprises nearly 29 percent of Kenyas GDP. In addition, Kenya boasts the largest exportation of tea in the world. This year, however, a lack of rain has damaged Kenyas agricultural output. Its export crops will be hit especially hard. Kenyas coffee output, for instance, has fallen by 30 percent over the past year. This and other export industries face strict marketing regulations. Until they obtain the freedom that the tea industry has to set their own markets they will continue to suffer declining foreign revenue. Kenyas current account deficit will continue to decrease in 1999. The nations poor economic performance has caused Kenyas imports to fall more than its exports. Inflation will begin to fall over the next few years. The average inflation for 1998 was 7 percent, and this number should fall to 5 percent by 2000. This will occur simultaneously with falling interest rates and a tight money supply. Kenyas government should balance its budget for 1999 through increased revenue collection.
Rank 9
Score 69.8
Kenya ranked 10th in the quantitative section. Interestingly, Kenyas tax structure is one of the most business-friendly of the 11 countries studied. Its corporate income tax is the second lowest in the Index, and half of the countries have higher capital gains and value added taxes than Kenya. Unfortunately, these benefits are not reaped by the average Kenyan. Kenya has the lowest GDP per capita in the Index. This is also reflected in the Gini wealth distribution index, which ranks ahead of only South Africa. Overall, four countries have lower average GDP growth rates than Kenya. Kenya will need to do more to attract outside investment, however. Its foreign direct investment as a percentage of GDP ranks last in the Index and is only one-fifth that of Zimbabwe, the next-lowest recipient of foreign investment.
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Risk Performance
In terms of currency volatility, Kenya has offered relatively stable conditions of late only two countries in the Index have less. While this may sound inviting, Kenyas black market premium is just the opposite: at 6 percent, only two countries have higher premiums than Kenya.
Kenyas qualitative performance left only two countries in the Index with lower rankings in this category. This is not due to the risks of expropriation or of contract violation, where Kenyas scores were average. Instead, the ranking reflected Kenyas poor credit ratings. Its international and institutional investor ratings both were fourth worst among the countries studied. Most important, though, is the great perception of corruption that exists in Kenya. Kenya was scored as more corrupt than any other Index country but Nigeria.
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MAURITIUS
Mauritius ranks third overall with a score of 96.4. With a small population of only 1.16 million people, this island nation offers an inviting economic environment for investment. This is reflected in the nations low unemployment rate of 5.8 percent. However, a lack of confidence in the ruling Labour Party government and its inability to calm ethnic violence and rioting has created concerns about political instability. Severe weather patterns such as El Nio have caused Mauritiuss agricultural sector to forecast a 20 percent contraction this year. Mauritiuss agriculture comprised over 8 percent of the countrys GDP in 1997, making it roughly one-third the size of its manufacturing sector. While the agricultural downturn will directly weaken the nations growth, the indirect impact it will have on its manufacturing sector will cause the greatest damage. Real GDP growth is projected to fall from 5.3 percent in 1998 to 3.5 percent in 1999. Tourism to the small island nation should fare better, maintaining a growth rate of 6 percent. Mauritiuss total exports boomed in 1998, with a 17.6 percent growth rate much higher than the 1997 rate of only 4.3 percent. Exports are as important to this nations economy as private consumption. Both components together account for 64 percent of total GDP. Mauritius Export-Processing Zone recorded a rise in exports of 13.1 percent in 1998. Exports from Mauritius Freeport Zone, whose value is two-and-a-half times smaller than the ExportProcessing Zone, rose by a dramatic 88.1 percent last year. The damaged agricultural crop will slow export growth for 1999, however. The large sugar crop, which comprises one-fourth of all exports, is officially forecast to drop by over 37 percent in 1999. With imports already outweighing exports, Mauritius current account deficit is therefore expected to rise from $63 million in 1998 to $94 million by 2000. A growing trade with the other member nations of two regional trade organizations will increase local exports in the long run.
Rank 6
Score 80.8
Mauritiuss strong economy led to its third-place ranking in the quantitative section. Mauritius boasts the highest GDP per capita of 33
the 11 African nations in the Index. Its growth rate is also strong, standing as the second highest in the Index at 4.85 percent. Mauritiuss relatively low average inflation rate of 6.83 percent also serves to invite investors into this small nation. Its tax structure offers below-average rates, providing additional business opportunities. Its equity market also is strong: Mauritiuss equity market capitalization-to-GDP ratio is the second highest of Index countries, while its bond flows relative to GDP are the highest of all Index nations. Its stable performance over the past several years makes Mauritius an attractive place in which to do business.
Risk Performance
Mauritius gives investors little to worry about, granting it a number four ranking in this category. The countrys black market premium is the same as that of South Africa at just 1 percent. Its currency volatility is in the middle of the pack, with five nations having greater volatility.
Qualitatively, Mauritius also ranks fourth. Minimal risk of expropriation or contract violation exists for investors here. Similarly, its corruption perception index has the third-highest ranking among the 11 nations. Mauritius credit ratings are also very strong, with its Institutional Investor credit rating exceeding that of all the other countries in the Index. This tiny country therefore offers large opportunities for secure returns on investment. Furthermore, according to Sumil Benimadhu, Chief Executive of the Stock Exchange of Mauritius, opportunities to buy low-cost stocks exist. Many stocks currently are trading at price-to-earnings ratios of 8, compared with a historical average of about 12.
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MOROCCO
Morocco ranks fifth overall with a score of 86.7. Moroccos economy grew a substantial 6.1 percent in 1998. This follows a year of negative GDP growth. Large rains have calmed fears of a drought for 1999. The expected large harvest should offset sluggishness in the manufacturing sector. The central bank this year will again lower interest rates in an attempt to encourage investment. This is expected to allow private consumption to grow by an average of 4.9 percent for the next two years. Exports account for 33 percent of Moroccos GDP. As Asia recovers from its slump, exports should continue to play a large role in further economic growth. Morocco also has strengthened its trade ties with France and China. Reform in the State Phosphates Office will ensure growth in this important industry. Phosphate sales this year will comprise about 30 percent of Moroccos total exports. The strong agricultural sector, increasing private consumption, and increasing exports will help the economy continue to grow by about 4 percent for the next few years. Unemployment continues to hamper full growth. About 35 percent of Moroccans under 25 years old are unemployed. Inflation will remain low, though, at between 2 percent to 3 percent for the next three years. Great hope for foreign investment in Morocco lies in privatization of key sectors. The privatization of utilities would bring an enormous influx of equity into the nation and spark the Casablanca Stock Exchange. However, privatization attempts have run into difficulty in the parliament, slowing fund flows into Morocco.
Rank 5
Score 86.7
Moroccos score of 80.1 in the quantitative section was the sixth best of the Index countries. Its performance is boosted by the lowest inflation rate among the countries at 0.89 percent. Foreign investors are welcome here, as is reflected by the highest foreign direct investment as a percentage of GDP at 3.85 percent. Moroccans enjoy the second-lowest interest rate among Index countries. Moroccos 35
total qualitative score was driven to the middle of the pack, however, due to average scores elsewhere and its poor showing in the following key areas. Its 35 percent capital gains tax rate was tied with Cte d Ivoires and was second highest in the Index, behind only Egypt. Morocco also had the third-worst ranking on the variable measuring percentage of government spending to GDP. Its low average GDP growth (fourth lowest on the Index) could cause Moroccos position to slip in the future.
Risk Performance
Morocco scored very well in the risk category of the Index, earning it the third-highest rank. This was due to its relatively low currency volatility, which was also the third lowest among Index countries. Meanwhile, Moroccos black market premium does not serve as a large disincentive for investors, as it hovers near the middle of the pack at 2 percent.
Morocco aided its overall rank with a third-place ranking in the qualitative section. Investors should feel secure here in terms of the possibility of contract violation. The country scored the highest in the variable measuring its rule-of-law principles. A number two ranking in the international credit rating category helped secure its position.
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NIGERIA
Nigeria ranks eighth overall with a score of 75.8. It has recently undergone a successful transition of leadership from a military government to an elected president, bringing to an end 15 years of military rule. The new president must face an ethnically divided country with regional interests. Militant ethnic groups in the north threaten to destroy oil production installations there if they are not satisfied with the governments antipoverty efforts. Petroleum is by far the largest export from Nigeria and is also the largest component of its GDP. These militant groups last year destroyed about onefourth of the nations entire output of petroleum. The new administration also enters into a government with ongoing conflicts about the future of privatization plans for the country. The president will most likely attempt to use the federal government as the main source of economic stimulus for Nigeria. The administrations desire to spend federal money on new programs and loosen the money supply should lead to large increases in the inflation rate. That figure could reach about 30 percent by the end of this year. The IMF would like to see more rapid privatization and general reform of political corruption if it is to secure donor funds for Nigeria. These foreign funds would relieve Nigeria of much of its foreign debt. A shortage of energy supplies in the nations production activities will slow Nigerias economic growth to 1.1 percent this year. The continued deterioration of Nigerias manufacturing sector will also contribute to this slowdown. Lack of investment in this sector has led to a greater reliance on imports of manufactured goods. Increasing imports and decreasing exports have also led to a $3.5 billion current account deficit. Expected increases in the world price of oil should lift growth back up to about 2.5 percent by 2000. Shell also has plans to develop four major offshore oil fields in Nigeria. This, coupled with new oil finds by Texaco, would provide a significant boost to the petroleum industry. These changes should serve to lessen the current account deficit by the year 2000. Nigerias agricultural sector performed very well in the past few years due to good weather. This success is insignificant, however, when compared to the countrys reliance on oil. Meanwhile, the Nigerian Stock Market continues the fall it has endured since mid1997.
Rank 8
Score 75.8
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Nigeria scores just below average in the quantitative section, with a rank of seven. Its poor rankings in most variables account for this position. Its place was salvaged, though, with very strong scores in tax structure variables. Nigeria has the lowest value-added tax rate, holding it at just 5 percent. It is also tied with four other countries that collect no capital gains tax. This, along with the second-lowest corporate income tax rate, makes Nigerias tax structure among the best in the Index. Nigeria also boasts the lowest government spending to GDP ratio, along with the fourth-highest score in total reserves as a percentage of GDP. But while it may look like an attractive place to invest, its overall economy is still struggling. Nigerias average GDP growth is the third lowest among Index countries.
Risk Performance
Nigeria offers very little risk to foreign investors, ranking second among all Index countries in this category. This is accomplished with the lowest possible current black market premium (0 percent). Nigerias currency volatility is second lowest among the study nations; only Egypts is lower.
Nigerias overall ranking is damaged with a last place ranking in the qualitative section of the Index. With a history of suspect military rule, Nigeria posted the worst scores in the corruption perception index, the Institutional Investor credit rating, and the Euromoney country credit worthiness rating. Nigeria also performed poorly in the remaining qualitative variables. It has the third-worst international credit rating and is tied for second worst in terms of its risk of expropriation. The incoming civilian government should provide hope for future stability.
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SOUTH AFRICA
South Africa ranks first overall in the Index. South African businesses got a boost when the new government reduced the corporate income tax rate five points, down to 30 percent. The 12 percent dividend tax was left unchanged, though, leaving the new total tax rate of 42 percent as a deterrent to foreign investors. The administration further declared that it is ready to accelerate the process of privatization of public entities. This should help to introduce large amounts of foreign investment into the country. Due to a recession in late 1998, South Africa experienced a GDP growth last year of 0.1 percent. While this is far from its average growth rate of 2.46 percent, this year should bring much of the same. As Nelson Mandela leaves office, the incoming president will maintain tight fiscal policy. Still, the federal government will continue to run a budget deficit of around 3.7 percent of GDP. This deficit led to a poor international investment rating for South Africa, which has caused many investors to steer away from the country. The central bank has used monetary policy to encourage growth recently by expanding the money supply. The new reserve bank governor has hinted that he may begin to target inflation as his main goal. The target range could be between 1 percent and 5 percent. The rate last year was 6.9 percent. The bank has also begun to cut interest rates by 4.5 points since their height when the recession began. These high rates had stifled domestic demand. This fall in demand caused South Africas mining, construction, and manufacturing sectors all to decline, with agriculture falling by nearly 20 percent in 1998. The new lower rates should increase consumer spending. As the business cycle takes its course, the economy is expected to jump-start back up to a rate of growth of over 3 percent by 2000. One domestic bank, however, warned that the lack of Y2K readiness could lessen that growth rate to nearly half of what is expected. Early this year, South Africa signed a free-trade agreement with the EU which includes 90 percent of all trade between the two entities. Twenty-seven percent of South Africas exports travel to the EU, while 43 percent of its imports come from that area. Since exports account for almost one-third of total GDP, such a deal affects a large portion of the economy. Export growth should lessen the current
Rank 1
Score 100.0
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account deficit temporarily, with rising imports increasing the deficit again in 2000. The rand has remained strong. It should depreciate only slightly by 2000.
South Africa led all countries in the Index in quantitative performance. Much of this performance can be attributed to the tremendous amount of activity in its stock market. South Africa has the highest equity market capitalization as a percentage of GDP by far, at over 189 percent. Its portfolio investment flows in both stocks and bonds are very active. It also has the highest score for the nonfinancial private sector-to-GDP variable. Even with these rankings, the average South African may not see the wealth that is being generated by the rest of the economy, as the country has the lowest ranking in the Gini income distribution index. South Africa has the second-worst average GDP growth in the Index at 2.46 percent. Its total reserves as a percentage of GDP are also the second lowest among the nations.
Risk Performance
While South Africas financial sector is strong, there is some risk involved in investment there. This risk gives South Africa a ranking of six in this category. This position is due mostly to its relatively volatile currency, which is fourth most volatile among Index countries. Its black market premium is very low, however, at just 1 percent.
South Africa ranks second in this category, helping secure its overall ranking. This score is due to its ties for the highest scores in terms of risk of either expropriation or contract violation. There also is a very low perception of corruption, giving South Africa second place in that variable. Its credit ratings are among the best, placing it among the top performers in the Index. All this makes the country an attractive place to invest. Political stability, even with a new president, should help South Africa maintain its strong qualitative performance.
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ZAMBIA
Zambia ranks last overall with a score of 59.79. It entered 1999 with a real GDP growth of -2 percent. The economy does show signs of improvement, however. Favorable outlooks are held for the nations mining and agricultural sectors. Real GDP growth is expected to reach 3 percent in 1999 and 4.7 percent in 2000. Inflation should fall to 13.6 percent by 2000. Zambia relies heavily on its copper exports as a source of economic stability. Its exports of copper are almost three times greater than its next most important export, cobalt. Unfortunately, Zambias main destination of exports is Japan. With the East Asian economic crisis still lingering, Zambias copper mining industry did not fare very well in 1998 and its outlook appears much the same this year. Zambias imports have thus begun to outpace its exports. This has left Zambia with an increasing current account deficit. The deficit was six times greater in 1998, at -$341 million, than it was in 1994. Some of its mines have recently been privatized and sold to foreigners, however. Asian imports should also begin to pick up as economic activity there begins to increase. These changes should stimulate copper exports by 2000 and help lessen the current account deficit. The government of Zambia should meet its budget revenue expectations this year. A full one-third of this revenue will come from foreign donors. One large reason for this aid is the governments positive efforts to privatize its mining industry. Its president has also won favor in the international community for attempting to halt the war in the Democratic Republic of Congo. Still, the government may default on some of the loans it had taken to import food in 1998. This would hurt its ability to borrow, causing a food shortage in Zambia this year. Taxes on imports of agricultural equipment have thus been suspended for two years in an effort to stimulate agricultural growth.
Rank 11
Score 59.8
Zambias poor quantitative performance led to a last-place ranking in this category. It has the lowest average GDP growth of the Index nations at 2.2 percent, with the third-worst GDP per capita. Much of the existing market wealth in Zambia remains in the hands of a 41
small number of firms. Thus, Zambia has the worst firm concentration ratio among Index countries. Its equity market also performs very poorly, with the worst equity market liquidity ranking in the Index. Its taxes are among the highest, and Zambians face the third-highest interest rate at 31.80 percent. They must also deal with the second-highest inflation rate in the Index, at nearly 25 percent.
Risk Performance
Zambia also scored the worst in terms of risk. The existing environment in Zambia causes many investors to shy away from the country. This environment includes the highest black market premium score in the Index at 32 percent. Its currency is also the second most volatile among countries studied.
Poor credit and an insecure legal framework give Zambia the second-lowest ranking in the qualitative section. Zambia posts the second-worst rankings in both its international and Institutional Investor credit ratings. Its rule of law is, along with a few other countries, the lowest in the Index. Unenforced laws lead to an insecure investing environment. This has created in Zambia the highest risk of contract violation among Index countries. Still, Zambia has managed to rank among the middle of the pack in the corruption perception index.
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ZIMBABWE
Zimbabwe ranks 10th overall in the Index, with a score of 66.73. Its economic outlook for the near future looks dim. Zimbabwes military involvement in the Democratic Republic of Congo has ruined its relations with the IMF. This has left Zimbabwe without international donor support. With real GDP growth of only 1.6 percent in 1998 and the possibility of a recession on the horizon, this support is dearly needed. As elections approach in 2000, the ruling government may consider implementing a command economy to gain control of the situation. It has already reestablished exchange rate controls and may introduce full wage and price controls as well as seek to control access to foreign exchange. Not much hope can be placed in Zimbabwes agriculture or mining sectors either. Tobacco is the nations largest export, and sales this year have been sluggish. Large rains have also threatened other main agricultural crops like cotton and maize. Economic growth for this year should thus reach only 0.5 percent. With the cost of imported goods rising quickly, domestic industry may lead to somewhat greater growth by 2000. With its constantly devaluing currency, exports should increase in the next few years, diminishing Zimbabwes current account deficit. Without IMF assistance, however, the fiscal deficit will continue to rise rapidly. The devaluation of its currency also caused external debt to skyrocket, rising by 64 percent in 1998. The Zimbabwe Stock Exchange has performed surprisingly well in the past year. Its index has increased almost 40 percent since September 1998. This does not account for inflation, however, leaving many foreign investors still leery about Zimbabwe.
Rank 10
Score 66.7
Zimbabwe ranks ninth in the quantitative section with an overall poor economic performance. While its GDP per capita ranks fourth lowest, as does its government spending-to-GDP ratio, many other factors rank next to last. These include its firm concentration ratio, its corporate income tax and value added tax, and its foreign direct investment-to-GDP ratio. This last variable is a direct result of the 43
fact that Zimbabwe, along with Kenya, offers the lowest foreign investment ceiling, at just 40 percent, of the countries in the Index. The controlling government has also paved the way for the highest interest rate in the index over 42 percent. Total reserves make up just 2.25 percent of GDP, the lowest percentage in the Index. The existing wealth in Zimbabwe is not distributed very equally, and the country ranks second lowest in its firm concentration ratio and third lowest in its civilian wealth distribution index. Citizens of Zimbabwe must also deal with the third-highest inflation rate in the Index, 18.74 percent.
Risk Performance
Zimbabwe is ahead of only Zambia in the risk rankings. Investors must beware in this country home to the most volatile currency in Index countries. Zimbabwe also has the second-highest black market premium for its currency at 14 percent.
Zimbabwe ranks ninth in the qualitative category. While its Institutional Investor credit rating ranks in the middle of the countries, its international credit rating is the worst in the Index. Foreign and domestic investors must beware of the high risks of contract violation and expropriation, where Zimbabwe ranks second to last. Much of this is due to its tie for the worst ranking in the variable measuring rule-of-law principle. All of this works together to create an unstable, unattractive investment environment. The governments ruling party will see to it that little change is made to the status quo.
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ABOUT THE AUTHORS

lenn Yago is Director of Capital Studies at the Milken Institute. He specializes in financial innovations, financial institutions, and capital markets, and has extensively analyzed public policy and its relation to high-yield markets, initial public offerings, industrial and transportation concerns, and public-and private-sector employment. The author of three books including Junk Bonds: How High Yield Securities Restructured Corporate America, Yagos work has been widely published in edited volumes and in scholarly journals such as the Journal of Applied Corporate Finance, Urban Affairs Quarterly, and Journal of Contemporary Studies . He most recently co-authored the Milken Institute Policy Brief, Mainstreamning Minority Business: Financing Domestic Emerging Markets. The Milken Institute Capital Access Index appears quarterly in Forbes Global magazine. Juan Montoya is a Research Analyst at the Milken Institute. Prior to joining the Institute, he was General Manager at MFD Textiles and a Financial Analyst at Mitsui de Venezuela. He received a BSBA degree from Universidad Catlica Andrs Bello, Venezuela, and an MBA from Babson College. Madani Tall is a Managing Director of Gladstone & Barrington. He is a specialist in restructuring and realignment of programs, having advised the governments of several nations, including that of Guinea-Bissau, the Republic of Guinea, and the Republic of Niger, as well as the Regional Stock Exchange for West Africa. His masters degree is from Institute des Etude Politiques, France. Christian Yoka is a Managing Director of Gladstone & Barrington. Prior to his work there, he was Senior Consultant with Exa International - France, where he was responsible for the sub-Saharan Africa banking and finance department. He holds an M.A. in 45
business and tax loan from the University of Sorbonne and an LLM from Boston University. Thomas Mims is Managing Director of Emerging Africa, Ltd., which he established in 1993 in response to the growing interest in sub-Saharan stock exchanges. He has worked in Africa as a financial and marketing consultant for 20 years and writes extensively on Africa economic topics.
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CAPITAL ACCESS INDEX

CAPITAL ACCESS INDEX: EMERGING AFRICA?

Capital Access Index: Emerging Africa?