POLITICAL ANATOMY OF MARKET SELLOFF IN SIERRA LEONE
by Mahmud Tim Kargbo
Some commentators have rushed to describe the recent national market turmoil as “historic” and “unprecedented,” yet its evolution has been quite traditional so far.
What may be different this time, however, is whether during and after the pandemic, long term stability can be restored with the policy tools that were available in the past.
The selloff started as a repricing of national growth prospects. Mounting evidence of economic weakness in the emerging Sierra Leone economy during the pandemic, along with persistently low growth in other sectors of the economy, made it hard for our market to ignore the impact on earnings and profitability of a national slowdown.
The selloff accelerated as fears spread that our policymakers may not be able to respond sufficiently quickly and efficiently to the pressure of the COVID-19 pandemic. Part of this worry has to do with the extent to which our Central Bank has depleted its ammunition store after years of carrying the bulk of the policy burden. But a more significant concern arises from the correct realisation that the primary response would have to come from our political leaders that are the source of growth and financial concerns this time, and not from the professionals in these sectors.
As is often the case in Sierra Leone, the selloff further gathered steam when traders realised that policy circuit breakers would not materialise immediately. The rout become disorderly for a short while when classic deleveraging technical forces, including forced generalised selling by volatility sensitive market investors and overextended portfolios, took hold of the markets. This result was the conventional mix of price air pockets, valuation overshoots and contagion.
Those are the typical stages of a generalised national market selloff by politicians. This cycle exhausts itself once prices come down sufficiently to create compelling bargains for sidelined investable funds. This tends to happen first for the best-managed companies with resilient balance sheets, and then it spreads to the market as a whole. And there is a lot of dry powder out there, including cash in the hands of households and companies that can be deployed in investment purchases or funds parked in bonds whose yields have fallen and that will look for higher return opportunities.
Long term asset price stabilisation could also come from a reinforcement of the markets’ economic and policy underpinning. But with Sierra Leone economic growth consistently failing to take off in the hands of our two major political parties (APC and SLPP), this responsibility has fallen in the recent past mainly to our central bank, led by our politicians the system traditional core. This time, however, genuine and durable stabilisation will require that a good part of Sierra Leone economic solution come from genuine emerging young politicians as nearly all our old politicians continue to fail us.
Given the economic and political challenges in many of the systemically important sectors of our economy, it will take time for growth to come back strongly and for comprehensive policy solutions to emerge. This could include the deepening of structural reforms without recycling people, the balancing of aggregate or the lifting of pockets of over-leverage and over-indebtedness. Or we must start to hold our politicians responsible for living flamboyant lifestyles. The ACC already set the pace in this drive by prosecuting for possession of unexplained wealth! And the judiciary must continue by convicting for such an offence.
As a result, the best that can be hoped for right now in Sierra Leone is short term market stabilisation through another series of liquidity-driven band-aids. This approach will provide much appreciated immediate relief, but it wouldn’t be sufficient to deliver the longer-term anchor of stability that the Sierra Leone financial system is searching for.