Budget Deficits and Stock Market Performance in Emerging and Frontier Markets in Africa

Stock markets provide firms an important source to raise equity capital to finance investment. However, some macro indicators, such as budget deficits, affect these markets and can hinder their performance. In Africa, although the performance of the Stock Exchange has been affected by budget deficits from January 2000 to December 2017, the mechanisms of these relationships have not been studied. The purpose of this research was to examine the relationships between budget deficits and stock markets in Africa. The research questions addressed whether budget deficits had a significant effect on stock market performance. The data used for the study were obtained from the World Bank’s World Development Indicators, Association of Security Exchange in Africa and International Monetary Fund financial statistics. The results indicate that a rise in budget deficits, holding other factors constant, negatively affects stock market performance. This might be due to the excessive borrowing of governments from the domestic market, which affects people’s willingness to patronise the stock market and to lend to firms for long-term investments. Other factors, such as money supply and GDP growth rate, significantly improve stock market performance. The implication of these results is that the government should manage deficit financing prudently with regard to borrowing to support stock market activities in Africa.