In April, Nancy Stetson, Deputy Manager, and Tebogo Skwambane, Network Specialist, conducted due diligence in five African countries including Zambia, Zimbabwe, South Africa, Namibia, and Swaziland. All of BBH's subcustody providers in these markets have obtained exemptive orders from the SEC making them 17f-5 qualified markets. This article describes efforts to develop capital markets in these countries and also highlights risks associated with investment in these sub-Saharan markets.

As one of the last remaining regions to attract foreign investment, Africa is considered a "final frontier" by many investors. Interest is expected to increase in the Sub-Saharan region as African countries vie for foreign investment through economic reforms. Despite the size and sophistication of the South African stock exchange, still considered the sub-Saharan giant, efforts by its neighbors to become more competitive have not gone unnoticed. In fact, there are now 14 stock exchanges in Africa and numerous additional countries are actively seeking to open exchanges.

Most of the countries with established exchanges have experienced political stability for a number of years. This stability allows governments to focus on encouraging foreign investment by deregulating their economies, privatizing, and lifting exchange controls. Although in some instances progress is slow, economic reform in sub-Saharan Africa is attracting investors. Furthermore, as returns begin to level off in more developed emerging markets, Africa presents the next, and perhaps the final, investment frontier.

Zambia

Zambia, a landlocked country located in southern central Africa, is slightly larger than Texas. Its capital city, Lusaka, is Zambia's largest city and functions as the country's financial center and is home to its only stock exchange.

In Zambia concerted efforts have been made toward compliance with Group of 30 (G30) requirements and general international investment standards in the establishment of the Zambian capital market. This is evidenced by the existence of a central depository, electronic trading, T+3 rolling settlement, and the netting of broker trades. However, a number of clearing, settlement, and registration risks still remain which will require the attention of regulators, the stock exchange, and development agencies involved in the Zambian capital market.

The Lusaka Stock Exchange (LuSE) was established in December 1993 and trading commenced in February 1994. The LuSE has been incorporated as a private limited liability company owned by its member brokers. The current capitalization of the LuSE is ZMK 420 million (USD 339,000). The LuSE is self-regulated although the SEC does approve stock exchange and listing rules. All equities are immobilized at the Zambian Central Depository which operates as an arm of the LuSE. Shares deposited with the central depository are registered in the LuSE's nominee name which creates potential investment risk as there is no clear legal distinction made between investor shares registered in the LuSE nominee name and the LuSE's own assets. To mitigate this risk, a proposal has been drafted detailing legislative amendments which provide for the separation of the LuSE's assets from the foreign-owned shares registered in its nominee name. In addition, the central depository is expected to be incorporated as a separate legal entity.

Although an impressive privatization schedule was developed and the formation of a privatization committee has taken place, there are only three listed and five unlisted companies currently traded on the LuSE. In order to encourage companies to list on the LuSE, the government has created various tax incentives-for example, the corporate tax for listed companies has been reduced to 30 percent from 35 percent. All trading in listed securities must take place on the LuSE and unlisted securities may be traded on the LuSE if they are registered with the SEC and the Registrar of Companies. Foreigners are permitted to trade unlisted securities on the LuSE only.

Contributing to Zambia's appeal is its lack of foreign ownership limits and the ability of foreign investors to trade in all market sectors. However, all foreign investor trades must settle through the LuSE.

The LuSE is only open for trading two hours daily, Monday through Friday; however, orders may be placed during normal office hours. The LuSE acts as settlement agent for cash and securities settlement. Securities move through the buying and selling brokers' accounts at the central depository before being moved to or from the appropriate subcustodian account. Although the subcustodian may credit/debit the account on settlement date, check clearance (of the stock exchange check) may take anywhere from 48 hours to 3 days contingent upon whether central bank deadlines are met.

Africa's "final" frontier holds much promise for foreign investors. Foreign investor interest will likely contribute to continued progress in these markets and their move toward meeting international trading standards and market practice. Should you wish to learn more about these markets, please contact Brown Brothers Harriman & Co.

The "complete edition" of the Brown Brothers Harriman & Co. article discusses Zimbabwe, South Africa, Namibia and Swaziland. This additional information is available by selecting sub-Saharan markets.

The information contained in this document is derived from secondary sources and is provided for information purposes only. At press time, we believe the market practice and other industry information to be accurate. Article content is not a recommendation for investment in a particular security or market and should not be construed as legal advice. Brown Brothers Harriman & Co. is not responsible for the misrepresentation of any information contained herein.

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