Developing strong and stable capital market

The diversity, importance and intensity of capital market in the present globalised world have got the attention of all sections of people. Investors, business class, leaders and policy-makers are on the top of the list. Every day, from morning to evening to night, millions of people around the world, curiously and passionately, keep watching the news on capital market, its movement- ups and downs, gains and losses, buying and selling. Investment in businesses and industries and increased productivity are great slogans of the 21st Century for all the economies. Every country wants to have a sustainable economic growth. The surest way to create real economic growth is to transform wealth from savers into productive investment for entrepreneurs and businesses. Savings present a resource for increased future consumption - an important and often overlooked factor for economic coordination - and they also fund talented people who invent things, build machines or buildings, and offer better goods and services.
It's not easy to encourage the people and make them invest in capital markets in the forms of shares, stocks or bonds. A strong and vibrant capital market only can do it. For sustainable economic growth, savings and wealth need to flow to the right direction so that maximum benefits are reaped. Capital markets play an important role in helping job creation, innovation and financial security. They enable people to save for retirement, afford to buy homes, finance their education, and grow their businesses and industries and they enable communities to get funding to provide necessary services. There are many kinds of financial markets, addressing many kinds of needs of the people in the fast-moving world.
Most capital markets in the modern age are centred around huge financial hubs, such as New York, Hong Kong, London, Tokyo, Mumbai and other cities. New cloud computing services allow for dynamic, adaptable and accessible transactions, which means capital markets are more liquid and less expensive to trade in than ever before. As of January 2016, the United States possessed the world's largest debt and equity markets in terms of market capitalisation and as a percentage of gross domestic product (GDP), no other country or region comes close in terms of aggregate size, and only Japan is comparable in terms of bond and equity markets as a percentage of GDP.
EMERGING CAPITAL MARKETS: In the last 25 years, emerging economies (EEs) have changed beyond recognition. The balance of global economic power has shifted significantly with these countries combined now accounting for 51 per cent of global output on a purchasing power parity basis. However, this economic power shift has yet to be reflected in emerging capital markets, many of which remain significantly nascent relative to their primary economy. Emerging markets account for only 22 per cent of total global equity market capitalisation and just 14 per cent of both corporate and sovereign bond market value, respectively.
Deep-rooted capital markets foster and foment firms' financial integrity through market discipline and the need to comply with internationally accepted standards on accounting practices, transparency and governance, among others. In spite of these benefits, however, capital markets in most emerging economies remain embryonic. Developing these markets is not an easy task, as it involves a large number of institutions, as well as complex building blocks, to ensure productivity and security of their operations.
"Investors have pulled near $ 1.0 trillion from emerging markets" was a news headline in an international daily.  A surge of capital gushing out of emerging markets has been toward $1 trillion over the past 13 months, roughly double the amount that fled during the financial crisis amid slumping confidence in the world's emerging economies.
Analysts say the flow may accelerate following China's currency devaluation and apprehension over an anticipated rate hike by the US Federal Reserve. Capital outflows result when investors, corporations, financial institutions and others move their money offshore, thereby applying downward pressure on the country's currency, investment in capital markets. Currencies nose-dive against the US dollar, dipping demand for imports and driving down aggregate demand. In June, for example, overall emerging market imports were 13.2 per cent lower year-on-year basis, according to a moving average compiled by Capital Economics.
"The collapse in emerging market imports reflects a more fundamental drop in demand as capital outflows have forced domestic demand to shrink and lower commodity prices have eroded incomes in commodity-producing countries," said Neil Shearing of Capital Economics. "So far, there is little sign that we have reached the bottom." When the investors find that their return on investments in capital markets is gradually sloping downward every day, they move their investments to other regions where they find lucrative profit from investment.
Bangladesh is one such country in the EEs. It has been encountering continuous brittleness of its capital markets - and it appears to be unabated. Newspapers published lots of news on capital exodus to foreign countries during the last few years that affected local investment scenario in capital markets and poor performance of banks.
The agenda for the G20 finance ministers and central bank governors meeting in Sydney recognised that intensifying and strengthening capital markets in emerging economies are crucial to both these goals and member-countries have identified this issue as most priority one for their deliberations. It's widely understood that stronger and deeper capital markets can help mobilise domestic savings and support efficient allocation of sporadic resources, increasing investment and growth.
FOUR PILLARS: Economists and analysts, after intensive  research, have revealed that strong and sound capital markets depend greatly on four pillars, namely, sustained macroeconomic stability, sound and efficient banking system, solid institutional frameworks and adequate regulations and supervision. All the pillars are important and equally interdependent; instability in any single pillar weakens and damages the other pillars. It's amply acknowledged that capital markets can't develop in unstable economies. Indeed, in a large number of economic/financial crisis episodes in emerging market economies, capital market activity contracted dramatically and, in some cases, practically disappeared (the Latin American debt crisis of the 1980s is a good example). Macroeconomic weaknesses are reflected in asset prices and, if serious enough, can result in the drying-up of a number of asset markets. In emerging markets, at times of banking difficulties when credit contracts sharply, capital markets, including corporate bond markets, will most likely also shrink significantly. This is what has been happening in Bangladesh's capital markets for the last few years.
A strong institutional framework that safeguards investors and creditors includes adequate mechanisms to enforce contracts and the rule of law. In turn, this requires: a capable and independent judicial system free of political pressures, legal processes that support prompt implementation of regulations, transparency in government policies and an adequate bankruptcy law. Unfortunately, the quality of institutions in most emerging markets including Bangladesh lags behind that of the developed economies. There is also a consensus that the foundation for an effective regulatory framework lies in development and strengthening of appropriate corporate governance. Although developed economies are by no means free from corporate governance deficiencies, this problem is pervasive among emerging market economies, and difficulties at the firm level quickly turn into a systemic problem.
The emerging economies need to take appropriate actions to reactivate and rejuvenate the fallen capital markets. Everybody knows that actions speak louder than words. We noticed with big surprise that some emerging countries' capital markets had been facing sluggishness and the index was continuously going down but the concerned authorities of these countries are found inactive especially in taking corrective actions. Rather they were found delivering speeches at national and international platforms. Appropriate actions have no other alternatives to revive the capital markets in the EEs.
To make the capital markets stable and strong, the policy-makers, the governments, the central banks and the related authorities and parties must share lessons, experiences and challenges, enhance cooperation that will eventually lead to greater financial stability and in turn strong capital markets. The government may play an important role by supplying long-term capital to the economy as is done by the developed economies. It has been agreed that government lending played a significant role in fostering key industries and companies in Japan and South Korea in the era of their economic development. At that time, the coordination function of governments was indispensable in reducing risks and dealing with asymmetry information.
The great challenges facing EEs' capital markets are noteworthy. However, the long-term economic success of these economies is intrinsically linked to the successful development of their capital markets, and strengthening them is essential if EEs are to fulfil their vast potential. The following time-tested measures can make the unstable, weak and languid capital markets strong and stable:
n Develop well-functioning regulatory, compliance and risk-monitoring systems of capital markets.  Such a stock market, along with well-designed institutions and regulatory systems, raises economic growth. Improvements in the regulatory and economic environments in some African countries have led to improvements in the liquidity and capitalisation of their stock markets. EEs can get the same benefits of growing strong capital markets,
n Make compulsory disclosure rules, accounting standards and enforceability of contracts,
n Promote privatisation of state-owned entities,
n Move to automated and computerised systems across all markets: automation not only minimises inefficiencies associated with manual systems, it also reduces the costs of transacting, increases trading activity, liquidity in the stock markets and speeds up operations,
n Demutualise the stock exchanges to improve governance from separate ownership. Demutualisation has become a global trend. In EEs, demutualisation can help dissuade unwarranted government influence,  
n Increase focus on mutual fund reforms. Often investor participation is directly or indirectly through pension plans, insurance policies, mutual funds, etc. Reform for these vehicles will assist in increasing institutional demand for investments and improve savings rates across the region,
n Familiarise measures that enable growth from informal sectors into stock and bond markets,
n Attract capital flows and encourage foreign participation and stop exodus of capital,
n Develop a comprehensive capital market database to foster investment analysis and academic research and enable the capital markets to adopt best research practices that will lead to increased investor attention to the region, and
n Promote education and training, hold seminars and workshops for the investors in capital markets.
The writer, a Chartered Accountant, is the CFO of a private group of industries.      
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