African countries are prioritising their financial markets, opening them to a wide range of capital to encourage investment in critical sectors, as economies on the continent face a shrinking fiscal space, exchange rate turbulence and mounting external debt servicing costs.
The Absa Africa Financial Markets Index 2023 reveals there has been continued progress in developing financial markets across continent in the past year, with many countries taking steps to bolster resilience against global market shocks.
Now in its seventh year, and with support from the UN Economic Commission for Africa, the index scores African countries’ financial development based on measures of market accessibility, openness and transparency.
Absa Corporate and Investment Bank CEO Charles Russon said that with global markets facing challenge after challenge in recent years, pushing many countries into crisis mode, this index shows promising signs that Africa’s financial markets are weathering the storm and reveal how economies can supercharge sustainable growth despite the difficult global macroeconomic environment.
“Many countries have seen the size of their domestic capital markets shrink as global risk aversion, higher global borrowing costs and concerns over debt sustainability have resulted in some pullback to Africa’s access to global capital markets,” said Russon.
He said countries need to prioritise the strengthening of their financial markets.
“This requires the creation of an enabling environment through appropriate policies and frameworks that encourage investment in local currencies in critical sectors, such as infrastructure and agriculture, to strengthen the continent’s food systems,” he said.
The index is conducted using extensive quantitative research and data analysis with surveys of more than 50 organisations across Africa, including central banks, securities exchanges, regulators and market participants. It tracks progress in developing financial markets across Africa.
The aim of the report is to show how countries can reduce barriers to investment and boost sustainable growth.
The findings show SA and Mauritius remain the only countries to score above 70 on functioning capital markets, which has been the case since 2019, suggesting there is plenty of scope for further improvement across the continent.
The index is calculated under the following subindices: market depth; access to foreign exchange; market transparency tax and regulatory environment; capacity of local investors; macroeconomic environment and transparency; and legal standards and enforceability
SA scored the highest, at 88, but that is down from last year’s 89, reflecting the impact of lower pension assets in dollar terms.
Mauritius was ranked 77th, similar to the previous year, highlighting the rise in sovereign and corporate credit ratings. Nigeria, Africa’s largest economy that has been battered by foreign exchange shortages and rising inflation, scored 67.
The index shows SA remains largest and most advanced market, scoring the full 100 at market depth and a strong market capitalisation, as well as the legal standards and enforceability indices.
SA scored a low 63 in the capacity of local investors subindex.
Russon said the fall was almost entirely due to the depreciation of the rand against the dollar, as total official retirement fund assets were virtually unchanged in local currency terms.
“The reduced size of pension assets per capita in dollar terms caused Morocco and SA’s Pillar 4 scores to decrease by 10 and 9 points, respectively,” he said.
He said that concern about inflation and fiscal positions weighed on government bond markets in other major African economies such as Egypt, Nigeria and SA.
Access to foreign currency relies on a well-developed banking system to provide liquidity to market participants and allow for more accurate pass-through of official exchange rates to the domestic economy, he said.
SA and Egypt continue to score highest as their interbank foreign exchange liquidity remains much higher than elsewhere in Africa.
Other key findings include biggest improvements by Zimbabwe and Rwanda, rising by almost two points each overall, linked to progress in building sustainable financial market frameworks.
The report showed that new assets are also becoming available on domestic exchanges, including the first sukuk bonds in SA and Tanzania.
“However, progress in the index has not been uniform,” said Russon. “Each country experienced a lower score in at least one of the six pillars that make up the report. This is mainly due to unfavourable global conditions outside of African policymakers’ direct control.”
He said rising interest rates in advanced economies prompted exchange rate depreciation, capital outflows and weaker foreign exchange reserves across Africa and the challenging global environment impacted liquidity and the size of domestic financial markets.
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