No country in Africa ‘standing still’ in financial market development

AFMI launch panellists discuss their progress

The global shocks of the past few years may have derailed political advances. But African countries are emerging more resilient as they continue to take steps to improve their financial markets.  

The seventh annual edition of the Absa Africa Financial Markets Index, launched on 12 October, highlights the further signs of progress for the majority of a total of 28 AFMI countries, with the inclusion of Tunisia and Cabo Verde. Scores have increased in 15 countries largely due to an improvement in market transparency, particularly from a rise in the number of credit ratings. The macroeconomic conditions in most AFMI countries have also generally stabilised from global shocks, leading to higher scores.  

Held during the International Monetary Fund/World Bank annual meetings in Marrakech, OMFIF convened a panel of experts from various financial institutions in Africa to explore how AFMI countries have recovered and worked to further develop their financial markets. 

‘When we go country by country, you struggle to find a country that, in the previous 12 months, hasn’t actively done something to help encourage open, transparent or accessible markets, and so no country here is standing still,’ remarked Jeff Gable, head of macro and fixed income research at Absa.  

Recovery from global shocks 

Global economic conditions are proving challenging to navigate. Lucie Villa, vice president and senior credit officer of Sovereign Risk Group from Moody’s Investors Service, lists inflation shock and difficulties in accessing external funding as factors that are ‘putting pressure on the liquidity of the domestic market’.  

Despite such macroeconomic conditions, the increase in AFMI scores for many countries reflect the increased resilience that AFMI countries have built into their financial markets. The report finds that this correlates directly with all the surveyed countries making efforts to improve product diversity, incorporate environmental, social and governance measures into financial markets and improve transparency.  

Augustine Simons, head of Ghana fixed income market at the Ghana Stock Exchange, discussed the effects of rising inflation and interest rates, explaining where those impacts on their market diverge. Simons explains that it’s a ‘really difficult time for the [Ghanaian] market’. He highlights that importance of engaging with market participants, particularly pension fund managers, to ensure market activity and therefore, liquidity.  

On the other hand, Chakudza Linje, director for financial markets at the Reserve Bank of Malawi, highlighted a benefit of these market conditions for Malawi, where there’s an increase in pension savings rate, which is why they have ‘seen a huge surge in the stock market’.  

Sustainability and ESG measures a priority  

ESG products can also unlock new sources of financing at a time when many African countries are kept out of international capital markets. During the panel discussion, Simons, Linje and Emmanuel Maluke Letete, governor of the Central Bank of Lesotho agree that sustainability is an opportunity for their countries to improve access to financing.  

Although, as Linje puts it, ‘we’re still in our infancy in trying to develop that part of the market’, Simons explains Ghana’s optimism for this opportunity. For instance, Ghana Stock Exchange published an ESG guidance manual, which ‘in a few years to come’, will pave the way for ESG products to come into the market, and help Ghanaian companies to be more accountable for the impact of their businesses. 

Letete hopes that in ‘five to six years’, they would see their AFMI scores improve through the introductions of ESG measures. The Central Bank of Lesotho are actively working on a green bond issuance guideline, which they hope to issue ‘probably in the next one to two years’.  

ESG measures are also intended to mitigate the effects of climate change and build resilience into the financial market frameworks or regulation. Linje outlines how the Reserve Bank of Malawi intends to work with NDC Partnership to undergo a complete capital markets diagnostic analysis to develop their financial system’s resiliency to climate change. Given that Malawi had suffered from a series of devastating cyclones in recent years, with serious effects to their macroeconomic environment, Linje emphasises a ‘need as a country to ensure that we are protected’.  

Looking to the future 

When asked what they would like to see in the future of financial markets in Africa, a common theme of using investor education, improving market depths and raising the number of products available emerges among panellists. To reach the point where liquidity would no longer be a concern may partially involve a slew of factors. This includes sustainability to ensure protection from the effects of climate changeadequate access to financing, market depth to encourage more funding that could feed back into their countries and financial literacy to encourage a more knowledgeable investing public.  

These are areas that panellists recognise will need more work to be done, in addition to addressing other issues brought up in the panel, such as tax regime, enforceability and continued recovery from macroeconomic shocks. Villa closed out the discussion with an optimistic comment that countries are at least ‘going in the right direction and recognising that there will be relatively long roads to reach that level [of South Africa or Namibia]’.  

Panellists are hopeful, and with the progress AFMI countries have made in the past seven years since the index was created, the next seven years could yield further breakthroughs 

Katerina Liu is Research Analyst at OMFIF. 

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