EDITORIAL: JSE needs to overcome delistings crisis

The JSE, Africa’s largest stock exchange, is facing an existential crisis. With a tanking economy, the future looks even bleaker.

For the past few years, the JSE, also one of the oldest public markets, has been losing listings as companies choose to operate in the softly regulated private market. This trend has accelerated in recent times.

In a way, the JSE’s crisis is a mirror of SA’s economy, which remains concentrated and dominated by a few conglomerates. This is despite an aggressive stance adopted by Ebrahim Patel, the trade, industry & competition minister, to deconcentrate the economy.

Patel, a former trade unionist, has found out the hard way how blunt the competition law is as an instrument of breaking up large companies. Frustrated by his inability to break up companies, he has resorted to imposing onerous conditions to accompany mergers and acquisitions.

Consequently, the top 40 stocks listed on the JSE continue to account for 80% of the bourse’s market capitalisation. New listings are few and far between. The relaxation of exchange controls, which buttressed the apartheid laager economy, has done little to attract new entrants into the exchange.

The reasons for the delistings exodus are not hard to work out. SA’s economy is stuck in a low-growth rut. On Wednesday, Enoch Godongwana, the finance minister, confirmed further bad news: that is, SA’s economy, which is strangled by rolling power outages and a collapsing freight logistics system, will only grow at 0,8% — slower than February estimates.

With a constrained economy, companies are choosing to sit on their cash instead of investing into expansion that will not be supported by reliable electricity or transport to ship out their produce. Within this context, capital raising, the other reason for thriving stock exchanges, becomes redundant.

The slow pace of reforms — for example, to introduce competition in the electricity generation and rail and port operations — are making capital raising unattractive.

In recent times, the government and President Cyril Ramaphosa have been punting private sector participation, or lighter forms of privatisation into rail, ports and electricity monopoly sectors. In theory at least, this should be good for the JSE as new entrants would need capital injections.

In reality, however, this hope cannot be sustained. There are plenty of reasons for this, but two stand out. First, the government’s commitment to this path is shaky especially during an election year. It remains unclear whether Ramaphosa can persuade his party colleagues to take this route.

Second, most of the government’s proposals for private sector involvement appear to be predicated on the belief that the private sector will provide cash-strapped state-owned enterprises (SOEs) with money. For example, in terms of the government’s logic, some SOEs will be floated on the stock exchange to raise capital.

It is not immediately clear why shrewd and responsible shareholders would inject money into a state-owned company they have scant control over. Efficiencies are further down the line of the government’s priorities.

Some of the reasons for the departures from the JSE are within its control. The costs of listing and compliance are prohibitive and cumbersome, and disproportionately benefit lawyers, auditors and accountants. Transparency is the main casualty.

To save itself, the JSE’s management and owners need to work with other stakeholders, such as the financial media, to work out pragmatic win-win solutions to the crisis.