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Emerging capital markets play an increasingly vital role in the global economy by opening up international supply and lower costs of capital, affirms ACCA (the Association of Chartered Certified Accountants).

Recent ACCA’s discussion paper The Rise of Capital Markets in Emerging and Frontier Economies considers how institutions and accounting profession facilitate economic development through capital market growth.

The report reveals that:

• Financial disclosure and assurance are critical to the health of capital markets and play a substantial part in determining whether their growth will benefit or hurt domestic economies.
• Markets fail because of lack of liquidity – but they can also become unstable when liquidity outgrows their institutional frameworks
• Capital markets are brands – reputations are hard won and easily squandered, but yield rewards
• Capital market development is a regional agenda – no regulator, exchange operator or government operates in isolation
• Dominant family firms and formerly state owned organisations are the norm, not the exception, in emerging capital markets. Governance arrangements need to reflect this and cannot simply be borrowed from practices in more established markets.
• Market development is a learning experience for everyone involved, be they regulators, market participants, or the general public. Some lesson take a long time to learn, or must be learned the hard way.

Dean Westcott, ACCA’s President said: “Developing capital markets need increasingly transparent corporate governance and ethical business approaches to encourage investor confidence. And in the future, we are sure that environmental, social and governance reporting are likely to become part of a broadening landscape of corporate disclosure and reporting.”

ACCA believes that capacity building around financial systems is essential. This allows capital markets to enable the most promising firms – both large and small – to source funds more cheaply and reliably than would otherwise be possible. But in order to do this, these firms need access to reliable financial information, which in turn depends on the skills and competences of professional accountants.

Dean Westcott said: “Investors cannot be expected to assume the risk that comes with investing in what is often a novel and illiquid asset class without the best quality information possible; and they cannot be expected to participate in markets where crucial information remains private. This is why policymakers and the accountancy profession around the world have long championed the value of disclosure and assurance and must continue to do so.”

Inga Jubele, Finance Project Manager at Air Baltic Corporation, commented: “Strengthening capital market in any of economy requires strong contribution from the government, as well as investors and investment subject. Running the same process in emerging country adds additional pressure and very often ends with the wall between needs and possibilities. Some of the main reasons for that are lack of experience, knowledge, i.e. project management skills, structured approach and financial analysis and technical feasibility, i.e. lack of integrated data etc.”

“In order to enhance the process, constructive teamwork should be achieved among government (including regulators), investors and local business owners. The long history and development of professional bodies like ACCA demonstrates that experts in particular areas are those who can enhance changes and ensure continuous development that then leads to sustainable growth. Emerging market participants should not fail at that stage and involve relevant experts. And only then we can expect that at some point in the future we will experience increase in number of those companies that fulfill all requirements – just to take the opportunity to benefit from global investment markets.”

Mr Westcott concluded: “Our reports show that the perceived strength of accounting and auditing standards is a leading indicator of the health of capital markets and a strong predictor of their ability to drive economic growth. While the financial crisis of 2008–9 dented confidence in disclosures in developed markets, emerging markets have seen perceptions slowly recover and, perhaps as importantly, converge.”

You can find the full Capital Markets discussion paper on our Access to Finance micro-site: www.accaglobal.com/en/research-insights/access-finance.html

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