Next month, a new chapter will begin for the African continent with the opening of the first Pan-African bourse for commodities and derivatives. It will provide a platform for cross-border trade, price discovery and the risk management of African commodities and derivatives. Bourse Africa will be based in Botswana and is expected to eventually have a presence in every African country.
Selecting Botswana as the hub for Africa’s newest bourse was an obvious choice. Four decades of democratic civilian leadership and progressive social policies has resulted in making the diamond-rich Botswana one of the most dynamic and prosperous economies in Africa. Botswana is consistently ranked in the top five on the Ibrahim Index that grades countries in Africa on their performance of governance. It remains largely unscathed by the economic troubles experienced by the rest of the continent – mounting debt, internal conflicts, mercurial commodity prices, unskilled labour, resource exploitation, low income and productivity. Botswana has a resilient financial system, legal framework and solid democratic institutions.
Botswana’s remarkable annual growth of more than 6% is largely sustained by the prudent regulation of the mineral extraction industry, particularly diamonds. In August, De Beers, the world’s second largest diamond producer, officially announced that it would transfer its global aggregation operations (the mixing of similar diamonds) to Botswana and relocate its entire sales operations including personnel, equipment and technology from London to Gaborone, the Botswanan capital, by 2013.This milestone agreement between De Beers and the Government of Botswana (which owns 15% of De Beers) will bring $6 billion worth of diamonds to the country annually and create additional employment opportunities. The agreement will also allow the government to independently sell 10% of the diamonds manufactured in Botswana without the involvement of De Beers.
Bourse Africa will benefit from this additional activity in Botswana, and will help address some of the deep-rooted discrepancies in the trading of commodities. Contrary to common belief, the ‘resource curse’ paradox in Africa is not only caused by the abundance and exploitation of natural resources, but also by the extreme volatility of prices in the commodity markets. In Africa, this volatility is either due to production-related causes such as erratic weather and flawed input delivery, or policy related causes such as import and export restrictions imposed by each country. Futures contracts are a common type of derivative used to hedge against such risks. The contracts allow people to trade at an agreed price with a future delivery date. For instance, a coffee farmer in Ethiopia can strike a deal with a buyer in Botswana before the coffee beans are harvested, substantially mitigating the risk.
The government of Botswana is hoping Bourse Africa will tame this instability by improving the pricing mechanisms in both the commodity and the derivative markets. The African continent is endowed with massive natural resources worth an estimated $350 billion – more than the commodities of India and the U.S. combined. Bourse Africa will help realise the integration of the African economies and enhance their engagements with the international markets. It will adopt the hub and spoke model that will inter-link national and regional bourses to a ‘hub’ in Botswana.
Bourse Africa has already secured all the requisite regulatory requirements and will commence operations from October 2012. The first stage of Bourse Africa will focus on essential agricultural commodities like cocoa, coffee and cotton. Commodities like crude oil, gold, diamonds and other minerals will be launched later. Most importantly, Bourse Africa will harness Africa’s untapped diamond resources. Africa produces nearly 65% of the global diamond production worth $8.5 billion where Angola, Botswana and South Africa are the leading producers. A bourse will certainly help modulate this demand.
Another benefit: it will help to commodify diamonds, like gold and oil. So far, they have not been commodified because they cannot be mutually exchanged (not fungible) nor are they homogenous, thus making them difficult to standardise. For many decades, the world’s major diamond producing companies like Russia’s state-owned ALROSA and the De Beers group, both of which have a significant presence in Africa, have artificially inflated the prices of diamonds by controlling global supply. The De Beers consortium also artfully influenced the public demand for diamonds through a remarkably successful marketing campaign, “Diamonds are forever,” that convinced everybody that diamonds are rare, valuable and the ultimate sign of opulence.
But as the dominance of De Beers declined, well-known private diamond enterprises like Rapaport, Wyndham and IDEX –all based in U.S. – developed tailor-made indices using special grading techniques to standardise diamonds. These are currently used by diamond hubs in New York, Antwerp, Ramat Gan (Israel), Mumbai and Dubai to determine the market prices.
Bourse Africa is in discussion with the mining industry to commodify diamonds, i.e. treat them as just another asset class which will then attract financial participants. If successful, it will be one of the first bourses to trade diamonds as a commodity by making the information regarding demand, supply and the pricing mechanism more transparent.
Bourse Africa is promoted by Financial Technologies India Limited (FTIL), the flagship venture of the Financial Technologies (FT) group that operates the successful Multi Commodity Exchange (MCX) – India’s biggest and the world’s fifth largest commodity exchange. The FT group has the requisite domain knowledge to implement this project – it has already built several exchanges across India, Mauritius, Singapore and Dubai. In 2008 it bought a 60% share in Bourse Africa Limited. India has also mandated the Indian Diamond Institute in Surat to set up the India-Africa Diamond Institute (IADI) in Botswana, to train African nationals in the sorting, cutting and polishing of diamonds.
FTIL’s greatest achievement will be Bourse Africa – and it will be noticed world-wide. During the G-20 Pittsburgh Summit in 2009, global leaders declared that standardised derivative contracts around the world should be traded on exchanges and electronic trading platforms by the end of 2012. These developments will vastly improve the international competitiveness of Africa’s financial sector and induce investments across its various commodities markets.
The establishment of Bourse Africa is a significant development for India’s global economic diplomacy, which has remained passive and largely driven by its private sector. For years, India has been building the financial and regulatory systems of other nations but it has also been losing opportunities to countries such as Japan that seized the bid to build Myanmar’s national stock exchange. There is great potential in building regulatory bodies in Africa, where 25 countries have stock exchanges, but only 11 have an independent market regulator. In most of these countries, the stock exchanges also double up as regulator, but are considering separation says K.N. Vaidyanathan, the former Executive Director of the Securities & Exchange Board of India (Read ‘India: Financial Regulatory Exporter’).
Private Indian players like Financial Technologies can help India jump the queue by being more proactive. There are similar opportunities in Afghanistan and Central Asia to be pursued. Bourse Africa can set the precedent for these future projects.
Anirudh Menon is Researcher, Africa Studies Programme, Gateway House: Indian Council on Global Relations.
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