African markets resilient in crisis

Launch of the Absa Africa Financial Markets Index 2020

The strength and resilience of Africa’s financial markets will determine its ability to withstand the impact of the Covid-19 crisis, and have a significant impact on countries’ long-term economic growth. On 14 October, senior policy-makers from across the region and beyond examined how African economies are performing in the fourth Absa Africa Financial Markets Index, an annual assessment of financial markets’ infrastructure and regulatory environment.

Responsive policy-making has kept emerging markets resilient. Tobias Adrian, director of the International Monetary Fund’s monetary and capital markets department, explained that stress on bond markets is abating much more rapidly than during the 2008 financial crisis. Fast, aggressive policy actions from central banks and finance ministries helped debt markets recover relatively quickly.

African policy-makers can take cues from how other emerging markets fared in previous crises. World Bank Vice-President and Treasurer Jingdong Hua drew from the experience of South Korea during the 1997 Asian financial crisis, when it was entirely reliant on dollar borrowing. Today, 80% of the country’s local currency corporate bond market is equivalent to 80% of GDP, showing the progress it has made in developing its local capital markets.

Absa Chief Economist Jeff Gable emphasised that the purpose of the index is to encourage effective financial market development and spotlight its role in attracting global capital and mobilising domestic assets.

OMFIF Chief Economist Danae Kyriakopoulou, and George Asante, head of global markets for regional operations at Absa, presented highlights from this year’s index, singling out developments that boosted country scores. They reported that Seychelles’ market capitalisation grew despite the challenging environment, and Mauritius opened up its stock exchange to international central securities depositories. Namibia was praised for its initiatives in encouraging asset managers to invest domestically. Kyriakopoulou and Asante also noted region-wide developments, such as efforts across countries to improve legal infrastructure.

Senior central bankers from countries featured in the index helped contextualise the report’s findings. Harvesh Seegolam, governor of the Bank of Mauritius, said Mauritian financial markets owed their resilience to the development of supportive infrastructure. He also credited regulatory frameworks that encourage investment and innovations that enable access. Sheila M’Mbijjewe, deputy governor of the Central Bank of Kenya, recognised the value of data-driven indices to help policy-makers identify areas for improvement. She emphasised the importance of having a nuanced understanding of individual countries and the distinct challenges they face.

Hua underscored the fundamental role of capital market development in achieving Africa’s full economic potential. Deep, liquid and well-regulated capital markets are necessary to utilise domestic savings in financing a country’s economic growth. He noted the crucial part that sustainability plays in market development, praising how the latest edition of the index highlights the importance of financial instruments that support environmental, social and governance goals.

Infrastructure development is an area that can benefit from mobilising capital and resources in Africa. William Lugemwa, director for private sector development and finance at the United Nations Economic Commission for Africa, pointed out that many African countries rely on foreign currency loans to fund infrastructure, which has created problems. Financing critical infrastructure using local currency debt could be one way to spur growth in capital markets.

About the Absa Africa Financial Markets Index

The index covers 23 countries: Angola, Botswana, Cameroon, Egypt, Eswatini, Ethiopia, Ghana, Ivory Coast, Kenya, Lesotho, Malawi, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Rwanda, Senegal, Seychelles, South Africa, Tanzania, Uganda and Zambia.

It evaluates countries across six pillars: market depth; access to foreign exchange; market transparency, tax and regulatory environment; capacity of local investors; macroeconomic opportunity; and legality and enforceability of standard financial markets master agreements. In addition to quantitative analysis, OMFIF surveyed more than 30 policy-makers and top executives from financial institutions operating across the 23 countries, including banks, investors, securities exchanges, central banks, regulators, audit and accounting firms and international financial and development institutions.

Kat Usita is Deputy Head of Research at OMFIF.

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