The rise of capital markets in emerging and …

1 The rise of capital markets in emerging and frontier economies ABOUT ACCA. ACCA (the Association of Chartered Certified capital markets promote Accountants) is the global body for professional accountants. We aim to offer business-relevant, economic development and first-choice qualifications to people of application, ability and ambition around the world who seek a growth by facilitating and rewarding career in accountancy, finance and diversifying firms' access to management. finance. In order to do this Founded in 1904, ACCA has consistently held unique they rely on institutions, core values: opportunity, diversity, innovation, integrity and accountability.

2 We believe that including sound financial accountants bring value to economies at all stages of their development. We seek to develop capacity in the reporting and assurance, and profession and encourage the adoption of global these in turn depend on the standards. Our values are aligned to the needs of employers in all sectors and we ensure that, through accounting profession. This our qualifications, we prepare accountants for business. We seek to open up the profession to discussion paper considers people of all backgrounds and remove artificial how these relationships work barriers, innovating our qualifications and their delivery to meet the diverse needs of trainee and how policymakers can professionals and their employers.

3 Build on them. We support our 140,000 members and 404,000. students in 170 countries, helping them to develop successful careers in accounting and business, based on the skills required by employers. We work through a network of 83 offices and centres and more than 8,000 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence. CONTACT. Emmanouil Schizas senior policy adviser tel: +44 (0)20 7059 5619. The Association of Chartered Certified Accountants, March 32 2012.

4 The rise of capital markets in emerging and frontier economies Executive summary capital markets play an important role in promoting As a rule, the distinction between frontier ' and economic activity worldwide by facilitating and emerging ' market status (see Appendix for a diversifying firms' access to finance. At the macro level, classification) is sharper than that between emerging '. deepening capital markets , which have ample liquidity and developed' markets . If the intention of policymakers and developed secondary markets , are also reshaping the in frontier markets is to benchmark against emerging developing world, driving wealth creation and the emergence ones, then policy will tend to focus on ensuring financial of powerful regional trading blocs.

5 The fortunes of ACCA's stability and improving the supply of financial services global membership are strongly tied to these developments. other than banking, while also developing the banking sector and improving the wider business environment. In In emerging and frontier economies , the benefits that emerging markets , on the other hand, the need to accrue to national economies as capital markets growth replicate the institutions of developed ones is not self- and deepen are potentially greater, but they are also evident. If there are shortcomings in comparison, they will particularly sensitive to a host of institutional variables, tend to have more to do with the use of professional including competition, protection of minority investors management, the protection of minority shareholders and and overall business productivity.

6 Because of this, access to financial services among the wider population. supporting the development of capital markets usually involves a broad and ambitious programme of reform. That said, the development of domestic capital markets is Even then, successful market -builders need to be alert to not linear and policymakers should not obsess about signs that markets might be outgrowing the social and metrics such as liquidity. The needs of liquidity providers regulatory capital on which they rely. The need for are not necessarily the same as those of investors and it vigilance is especially great because, as the crisis of is possible for markets to provide a better environment 2008 9 demonstrated, markets can continue to grow and for the former rather than the latter, to the eventual attract liquidity even as institutions are being eroded detriment of all.

7 Moreover, headline levels of liquidity can away from underneath them. mask substantial misallocations (for instance at the expense of smaller businesses) that direct capital to less The system of financial disclosures is one such institution, than optimal uses. and there is evidence to suggest it might be one of the most important ones. The perceived strength of This paper argues, on the basis of sound evidence, that accounting and auditing standards is a leading indicator improved disclosure, both mandatory and voluntary, is of the health of capital markets and a strong predictor of one of the few sustainable means of attracting liquidity.

8 The growth effect of market liberalisation. While the crisis The experience of markets around the world shows that of 2008 9 dented confidence in disclosures within the timely and credible disclosure of company information developed countries, emerging markets have seen tends to promote investor confidence and attract perceptions slowly recover and, perhaps as importantly, additional listings, thus broadening the benefits to the converge. frontier markets , on the other hand, are not domestic economy. In principle, disclosure also serves to keeping up, meaning that some of the most promising reduce the cost of capital by reducing information economies in the world may soon not have the capital asymmetries, especially in developing countries with high markets to match their dynamism.

9 Standards of market conduct. That said, the mechanism through which this is achieved is complex and sometimes As things stand, the momentum in favour of larger and appears to produce contradictory results. deeper capital markets in the developing world is substantial but not irreversible. While market Disclosure and compliance, however valuable, both come capitalisation has grown impressively and kept pace with at a cost and thus policymakers are faced with a difficult levels of growth seen in the developed world, market trade-off. On one side are those, mostly in emerging and liquidity has not. Although emerging economies are better frontier markets , who believe that only strong and off without the excess liquidity that the most developed consistent regulation can build enough confidence to capital markets saw leading up to 2007, it remains the make a market viable.

10 On the other side are those, mostly case that markets need to deepen further if they are to in developed markets , who argue that disclosure and help finance the rapid growth expected in these other regulatory requirements can easily become economies . disproportionate, making markets inaccessible to all but THE RISE OF capital markets IN emerging AND frontier economies 1. the largest or most determined issuers. The evidence examined in this discussion paper suggests that policymakers can, through consistent and strict enforcement of proportionate rules, build a strong regulatory brand' for their markets that will attract domestic and even foreign firms.